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China’s home mortgage-backed securities market has shrunk by nearly two-thirds over the past year after a wave of early repayments by property owners highlighted the country’s tight investment environment.
The market size was Rmb363 billion ($51 billion) in March, compared with more than Rmb1 billion a year earlier, according to data from Fitch Ratings. Prepayments jumped last year and are on the rise again, according to the credit rating agency.
In March, mortgages backed by securitizations defaulted at their highest level this year, which would equate to a prepayment rate of 43 percent on an annualized basis — about four times the typical rate.
Analysts said the data, which partly reflects the impact of the government cutting borrowing costs, suggests more households are opting to pay down their debts in the absence of viable investment options and against an uncertain economic backdrop.
The securitization industry, in which assets are bundled together and sold to investors as bond-like instruments, is providing a window into China’s huge Rmb38tn mortgage market at a time when the property sector has struggled to reverse a multi-year slowdown.
The national rate before repayment of home mortgage-backed securities initially jumped as high as 63 percent on an annualized basis in September, when major state banks unveiled mortgage rate cuts that analysts said led to refinancing.
The move was one of several attempts to support the property market after a financial crisis among developers emerged in 2021, hitting the construction industry and the wider economy hard.
Tracy Wan, director of Fitch Ratings, said the agency initially believed the increase in prepayments was a “one-off” as a result of the policy change, given that banks in China can in many cases refinance the entire loan at lower rates. However, this year’s “acceleration” could be partly due to customers choosing to use cash to pay off their debt rather than actively investing.
“Even before [the policy change]we are seeing a steady increase in advances [rate]. People [were] feeling that it doesn’t make sense to pay a high mortgage rate with a low return on investment for them to repay,” she said, pointing to the low returns on wealth management products in particular.
Investors in mortgage-backed securities are exposed to “default risk” when the mortgages underlying their trades default early and they need to find new places to park their money at similar rates.
China’s mortgage market is dominated by state-owned banks, which are the world’s largest by assets. There have been no new issues of mortgage-backed securities in China since 2022, according to data from provider CN-ABS.
“It all has to do with the real estate market. . . there are fewer people buying houses,” Andy Lai, Asia Pacific head of asset origination and structuring and securitization at BNP Paribas, said of the decline in new issuance.
“There haven’t been as many investment opportunities in China,” he added, pointing to “the economy, stock performance” and “restrictions on offshore investment.” “So one safe way to invest money is to prepay mortgages.”
Jerry Fang, a director at S&P Global, said there were likely “several factors” behind the high prepayment rate. He pointed to an increase in sales of existing properties, as opposed to concerns over purchases of new buildings due to problems with developers’ finances.
“For existing homes, sales continue to increase,” he said, adding that this will lead to prepayments on some mortgages.
More news from Wang Xueqiao in Shanghai