China's real estate loans will keep its the rising momentum in the coming years due to people's demands to improve their living conditions, according to a report released yesterday by People's Bank of China (PBOC), the country's central bank.

By the end of 2004, the outstanding loans of China's financial institutions were 17.7 trillion yuan (US$ 2.2 trillion) and PBOC estimates the outstanding loans this year will reach 20.2 trillion yuan (US$ 2.5 trillion).

And the individual housing loans would be 1.9 trillion yuan (US$ 234.6 billion), 22 per cent higher than last year.

People's demands for better living conditions and the resettlement projects would be main reasons for house purchases, usually supported by bank loans, according to the report.

There is still plenty of room for rising individual housing loans because compared to developed countries, the size of such loans in China is still very small, the report said.

The individual housing loans in China account for about 11.7 per cent of the country's GDP by the end of 2004. While in 2001 the number is 39 per cent in the European Union and 60 per cent in England.

Real estate loans by the "big four" State-owned commercial banks have been operating well. The average non-performing loans (NPLs) ratio of the four lenders stands at about 5 per cent.

The individual housing loans are even better. The average NPLs are as low as only 1.5 per cent.

However, there are still some potential risks in issuing loans in the real estate sector, the report said.

The overheating real estate market in many big cities poses a potential risk for the commercial lenders.

Last year, house prices in downtown Shanghai increased 27.5 per cent than the previous year, and large amounts of "hot money" has been flooding into Shanghai. Statistics by the central bank show that in the last quarter of 2004, about one quarter of the money used to buy houses come from overseas.

In Beijing last year, about 17 per cent of the houses were bought not for own use, but for rent or sale when the prices increased. The figure in Yangtze River Delta cities is as high as 20 per cent.

When the house prices in these cities greatly plummet, chances might also become bleak for consumers in paying back the bank loans, said Zhang Yan, a property analyst in Beijing.

Meanwhile, the high dependence on bank loans of the real estate developers also put the banks at risk. About 70 per cent of the developers' capital are from banks. In Beijing, the ratio from 2000 to 2003 is even as high as 81 per cent.

Many developers are not competitive enough in the market and their failure would also mean increasing NPLs for banks, said Zhang.

Moreover, the banks have to deal with other problems such as applying loans with fake identification information, and the lack of sound credit rating system and professional staffs.

The central bank's report also said that many systematic loopholes should be responsible for the runaway real estate market in numerous cities.

The lack of effective control over the local governments on land plot sales also poses a serious problem.

Income from land plot sales serves as a big funding source for the local government, which becomes a big direct beneficiary of a hot property market. Many local governments even hope to see the land and house prices increasing rather than making plans to take control of it.

Meanwhile, there are no effective development strategies to control land supply, according to the report.

A direct result of the shortcomings on strategy is that the structure of housing types is far from reasonable. Most of the lands are used to build high end and luxurious apartments or villas.

Ordinary housing supply is then in shortage and consumers with middle or low incomes cannot afford the high prices.

The lack of taxes to control speculation also is blamed for the high housing price.

More importantly, to provide diversified financing access for the developers is very crucial to disperse the commercial banks' risks, according to the report.

The report also said that the investment in real estate has slowed down, and the housing prices in the country would also slow its rate of increase.