China banned

Real estate sector in Cambodia is sky-rocketing in the past few years; even though the world is going through a pandemic, real estate investment is still going strong. According to the Managing Director of CBRE Cambodia, Ann Sothida predicted that Cambodia’s real estate market will improve by 60 percent in 2021 compared to 2020.

Because real estate investment is believed to gain a great fortune, middle-class and lower-class started striving to invest in this sector. However, with very little income and small financial statement, they can only choose to get a home loan from a bank or project with “Zero Down Payment”.

What is “Zero Down Payment”?

A down payment is a payment made as part of a large purchase in the early stages of a financial arrangement. For example: If you buy a house with 30% down payment, you have to pay 30% of the total value of the house at the first stage of purchase. A bank or other financial institutions covers the remainder of the costs through a mortgage loan or a house loan.

“Zero Down Payment” is zero percent payment of the total value of the house at the first stage of purchase. The buyer makes the whole payment through a mortgage loan or a house loan by the bank or financial institution.

Why China banned “Zero Down Payment”?

Buying a house with zero down payment is a violation of laws and regulations. According to the article 2 of the notice of the People's Bank of China on regulating housing finance businesses, China strengthened the management of personal housing loans and prohibited the issuance of "zero down payment" personal housing loans. The People’s Bank of China reiterated that when commercial banks issue personal housing mortgage loans, they should strictly evaluate the actual value of the collateral and implement the mortgage registration procedures. The ratio of the loan amount to the actual value of the collateral (debit ratio) must not exceed 80%. Borrowing is strictly prohibited for people issue "zero down payment" personal housing loans.

When a borrower applies for a personal housing loan to purchase an off-plan house, the purchased off-plan house must be the top of the main structure of the multi-story residential building or two-thirds of the total investment in the high-rise residential building. Commercial banks should carefully analyze the relevant conditions of development projects and housing development enterprises, and pay attention to prevent specific risks related to off-plan housing. Commercial banks must report to the People's Bank of China for approval for new types of personal housing loan businesses.

Banning “Zero down payment” is to prevent crises that happen when economy is unstable. According to China Daily News, the announcement triggered an online debate. A Shenyang citizen Wang told the newspaper that it would ease parents' pressure if there is a zero down-payment policy for students who want to purchase property. However, if the market falls, young people might not be able to bear the hit.

Why “Zero Down Payment” is popular in Cambodia?

Cambodia has undergone a significant transition, reaching lower-middle-income status in 2015 and aspiring to attain upper-middle-income status by 2030. Cambodia’s economy has sustained an average growth rate of 8 percent between 1998 and 2018, making it one of the fastest-growing economies in the world. Because the Cambodia economy is growing fast, lower-middle-income status strive to grow as well. However, with small income they choose to get a “Zero Down Payment” plan for buying their first home.

A huge amount of population in Cambodia still have limited understanding of mortgage and home loan. Most people tend to think that “Zero Down Payment” is an easy option to own a house, and left out the part that the interest of the home loan is larger with longer time to pay it off. Still, this option attracts a lot of new homeowners to invest.

A lot of projects with “Zero Down Payment” policy are mostly small projects located far away from the city, in an inconvenient location, because potential location in the city can cost heavily, which cannot put up with this policy, as it will results in a long term mortgage and the borrower cannot pay off and cannot be qualified for the loan . Moreover, the quality of material in these projects are low-grade, thus, the project is cheap and can be sold off with policies like this.

“Zero Down Payment” is used as a shiny advertisement to attract new homeowners as they start out wanting to own a property. This process can lead to a quick sale and quick revenue for the project owner. Therefore, they can start new project rapidly and build up a good name and reputation for the whole project to continue. A lot of people miss this point, fall for this kind of scheme and think that this is a good investment.

Final Thought

“Zero Down Payment” looks like an easy access into owning a home for small income people, yet, it can be very risky if the economy suddenly hits rock bottom. People should learn more about the policy of the project, ask for more information, be very detailed and be sure to evaluate the income and stability in the long run.

Author: Malinda