China's third largest property developer, Evergrande Real Estate, has joined smaller peers in offering zero-interest downpayment loans, a practice reminiscent of the U.S. housing boom that precipitated the global financial crisis.
The easy credit shows the gamble Chinese developers are willing to take to keep sales on track, but also highlights the risk of a broader industry correction if buyers default. So far such defaults have been rare in China, where household debt is low by Western standards and banks have traditionally required hefty deposits from buyers seeking mortgages.
Many analysts believe the slowing property sector poses the biggest risk to China's economy in the second half of the year, despite a rebound in home sales in June as state-controlled banks offered more credit to support the market.
Guangzhou-based Evergrande, the country's No.3 developer by sales, is offering downpayment loans of nearly a quarter of the purchase price to home-buyers for some of its projects.
Such loans skirt government rules that require a minimum deposit of 30 percent of a home price, while buyers who have put down as little as 6 percent upfront would find it easier to bail if the market turns.
"Buyers who can't provide the 30 percent downpayment are generally low quality," said Midland Realty chief operating officer Samuel Wong.
Data released alongside China's second quarter GDP numbers on Wednesday showed real estate investment slowed in the first half and new property construction plunged. Private sector surveys published ahead of official housing data due on Friday showed new home prices fell in June for the third straight month.
Home sales surged 32.5 percent in June compared with May, although they were down 5.4 percent compared with a year ago, as state-controlled banks offered more credit to buyers to avert a sharper slowdown.
While some analysts are still worried about financing difficulties, sluggish sales and rising inventories, others believe a recovery in credit growth will improve property sales in the near-term.
"We think the improvement will continue until the end of the year, while starting into Q1 next year we'll start to see another deceleration due to a strong base, so that's the time when people will get worried again," said Chen Long, China economist of Gavekal Dragonomics, based in Beijing.
In June, mortgage lending rose 6 percent from May to 117 billion yuan ($18.86 billion), official data showed, compared with monthly growth of 2.5 percent in May.
One of Evergrande's developments in eastern Jiangsu province's Yancheng city accepts downpayments of as little as 6 percent, according to a project salesperson, while the company provides an interest-free loan on the remaining 24 percent to be repaid over 24 months.
Another Evergrande project in the central city of Xian was offering interest-free loans to cover up to 40 percent of the required deposit, repayable over three years.
Evergrande declined to comment when contacted by Reuters, and it was not clear how widely the company was offering such incentives.
Liao Qun, chief economist at Citic Bank International, said interest-free downpayment loans increased the risk of default, but added that the scale of such promotions remained small.
Such incentives are more often offered by small, cash-strapped developers on selected projects, and are unusual among larger developers in China.
"The property market is undergoing a correction so developers need to launch these kinds of promotions to push sales," said Liao.
Showing the strain
While Evergrande recorded 69.3 billion yuan ($11.16 billion) of contracted sales in the first six months of this year, the third highest in China, the strain on its balance sheet is clear.