“When construction ceases, so does the mortgage. Deliver homes and get repaid!”
In June, this was one of the chants used by dissatisfied apartment buyers in China at a protest. However, their anger over unfinished dwellings extended beyond signs and chanting.
Hundreds of them quit paying their mortgages, a revolutionary act in China, where dissent is not permitted.
A young couple who relocated to Zhengzhou in central China told that after receiving the down payment last year, the developer abandoned the project and the development halted.
The unnamed woman stated, “I had envisioned innumerable times the thrill of living in a new home, but now it all seems absurd.”
A lady in her late 20s who also purchased a home in Zhengzhou told that she, too, is prepared to cease making mortgage payments: “Once the project is completely resumed, I’ll resume payments.”
In contrast to the 2007 subprime mortgage crisis in the United States, in which money was provided to high-risk borrowers who subsequently defaulted, the majority of these borrowers can pay but choose not to.
According to a crowd-sourced estimate on Github, where homeowners have posted about their decision, they have purchased homes in approximately 320 projects across the country. However, it is unknown how many have truly quit paying.
The spurned loans could reach $145 billion (£120 billion), according to S&P Global ratings. Others believe it might be even greater.
The uprising has shaken the authorities, concentrating their attention on a market that was already under pressure from a faltering economy and a severe cash shortage.
It has signaled a lack of confidence in one of the primary pillars of the second largest economy in the world.
In a recent report, the think tank Oxford Economics stated, “Mortgage boycotts, driven by deteriorating sentiment about the property, is… a very serious danger to the financial condition of the sector.”
Why is China’s property problem significant?
The property sector accounts for one-third of China’s economic output. This includes homes, rental and brokerage services, enterprises producing apartment-specific white goods, and building materials.
However, China’s economy has been weakening; in the most recent quarter, it grew by only 0.4% compared to the same period the year before. This year, several experts do not anticipate any growth.
This is partly down to Beijing’s zero-Covid approach; repeated lockdowns and ongoing restrictions have negatively impacted wages and, consequently, savings and investments.
Due to the scale of China’s economy, disruptions in key markets, such as real estate, can affect the global financial system.
The current issue, according to experts, is contagion; banks would not lend if they perceive the industry is collapsing.
According to Ding Shuang, head of Greater China economic research at Standard Chartered, “everything will depend on the policy.” “Unlike in other parts of the world, where property bubbles burst due to market forces, this one is caused by the government.”
Thirty real estate firms have previously defaulted on their overseas debt obligations. Evergrande, which defaulted on its $300bn loan last year, is the most prominent casualty. S&P has warned that further companies may follow suit if sales do not improve.
China is undergoing a demographic shift, with urbanization and population growth moderating. As a result, there is no increase in the need for housing.
“The basic issue is that the Chinese housing market has reached a tipping point,” says Capital Economics’ senior China economist Julian Evans-Pritchard.
How did we get here?
In China, real estate accounts for around 70% of personal wealth, and homebuyers frequently pay in advance for incomplete projects.
These “pre-sales” account for 70-80 percent of new home sales in China, according to Mr. Evans-Pritchard, who added that developers require this money to fund multiple projects simultaneously.
However, many young and middle-class Chinese no longer invest in real estate, most likely due to a sluggish economy, job losses, and wage cuts – and now the fear that developers may not finish projects.
Mr. Evans-Pritchard stated, “This is part of the problem; developers were banking on new funds, but these new sales are no longer occurring.”
ANZ estimates that more than $220 billion in loans could be related to incomplete projects. And credit, a significant source of liquidity during the boom, has now dried up.
In 2020, the Chinese government enacted the “three red lines” – a set of accounting procedures designed to limit the number of money developers may borrow. This lack of capital and the associated loss of market confidence has impacted banks’ willingness to lend to real estate enterprises.
What does the government accomplish?
First, Beijing is shifting responsibility to local governments, which are offering lower deposits, tax rebates, and cash incentives to homebuyers, as well as relief funds to developers. However, this comes at a price, since local coffers will suffer as property developers purchase less land.
Mr. Ding stated, “I believe now is the time for the federal government and regulators to intervene.” “At some time, it will intervene to isolate the problem of certain businesses. The sector’s importance to the economy is excessive.”
Recently, the Financial Times reported that China issued $148 billion in loans to assist real estate developers, while Bloomberg claimed that mortgage holders may be granted a payment holiday without harming their credit score.
Oxford Economics stated in a recent report that any government intervention in real estate and infrastructure may provide a short-term boost, but that “it is not ideal for China’s longer-term growth as the government and financial sector are forced to help sustain an unproductive (and failing) real estate industry.”
In addition, this is not merely a financial catastrophe. Mr. Ding stated that the boycott of mortgages risks becoming a severe social issue.
This might pose a dilemma for President Xi Jinping ahead of a major party meeting later this year, at which he is expected to seek an unprecedented third term.
What occurs next?
According to analysts, the reported $148 billion rescue may not be enough. According to Capital Economics, corporations require $444 billion to complete stopped projects.
It is also unclear whether banks, particularly smaller rural banks, can withstand the mortgage strike’s costs.
Even if development is resumed, many developers may not be able to survive because housing sales are unlikely to improve consumer attitudes. According to China Real Estate Information Corp., sales for China’s top 100 developers fell 39.7% in July compared to the same month last year (CRIC).
This crisis is the most definitive sign to date that China’s economy is at a crossroads.
Mr. Evans-Pritchard stated, “The government is doing its best to find new sources of growth, but it will be difficult given the economy’s reliance on real estate, infrastructure investment, and exports during the past three decades.”
The age of tremendous expansion in China is likely finished, and this is currently most evident in the real estate market.
