A China’s mortgage boycott “continues to multiply” and threatens to “become much more widespread”, according to analysts who say the landlord protest is already affecting 235 real estate developments in 24 of China’s 31 provinces.
It’s common for Chinese homeowners to start making mortgage payments on new properties before they’re finished, with their payments helping to fund construction. But many projects are facing delays.
“The boycotts appear to reflect growing concern among homebuyers about the ability of debt-ridden developers to deliver the homes they have sold, as well as some dissatisfaction with falling new home prices, which has left many many buyers are sitting on paper losses,” Julian Evans-Pritchard, senior China economist at Capital Economics, said in a July 15 note.
The development could send ripples beyond the real estate sector.
China’s growing middle classes piled their savings into real estate, thinking it was a safe haven for their hard-earned money. Tianlei Huang, a researcher at the Peterson Institute for International Economics (PIIE) think tank, cites a 2019 survey by China’s central bank, which showed that nearly 60% of total assets held by urban Chinese households were in commercial and residential properties.
Police officers watch people gather at Evergrande’s headquarters in Shenzhen, southeast China, on September 16, 2021, as the Chinese real estate giant said it was facing “unprecedented difficulties”, but denied rumors that he was on the verge of sinking.
Noel Celis—AFP/Getty Images
He points out that China has the highest homeownership rate in the world, standing at around 96% in 2020. property prices can trigger social instability,” he says.
Huang adds that China’s zero-COVID restrictions – which have wreaked havoc on the economy – have impacted both landlords, who have lost their jobs and incomes, and major developers. Property giant China Evergrande Group defaulted on debt in 2021, and at least a dozen other developers defaulted on offshore bonds. “Many are facing a serious cash flow crisis,” he says.
The real estate crisis in China
The scale of the problem is enormous. Construction of around 13 million apartments has halted in the past year alone, according to Capital Economics, and up to $220 billion in mortgages are tied to unfinished residential projects, according to a report by the Australian bank ANZ. Growing boycotts threaten to compound the problem, creating a vicious cycle where already struggling developers become even more cash-strapped.
Read more: Why the fate of struggling real estate developer Evergrande Group poses a huge headache for China
In his memo, Evans-Pritchard claimed that developers “have drawn public attention to the risks of buying unfinished homes and are likely to dampen the appetite for new home purchases.” He also warned that “banks will become more reluctant to extend mortgages for new home purchases from indebted developers.”
Michael Pettis, a senior fellow at the Carnegie Endowment for International Peace think tank and professor of finance at Peking University, says that over the past decade the Chinese have bought property with the belief that prices will only ‘increase. “That belief has been shattered,” he says, “and we know from the history of previous housing bubbles that once that happens it’s very difficult to prevent prices from falling much further.”
Regulators have already intervened. China’s Banking and Insurance Regulatory Commission has urged banks to lend to property developers so they can complete unfinished projects, according to Reuters. Bloomberg reports that authorities may allow owners to suspend payments on stalled projects, but only temporarily.
The main concern is the implication of a collapse in the real estate sector for the financial system, which is heavily exposed to real estate. On July 18, Fitch Ratings said an increase in mortgage defaults could be risky for banks and developers. “Authorities are likely to intervene to prevent mortgage defaults from spreading more widely and in major cities,” he predicted, “but a failure of policy intervention to restore confidence homebuyers could test the resilience of the banking system and increase liquidity pressure. [for] developers.
A residential construction site pictured in Changzhou, Jiangsu province, China on June 14, 2022
Sheldon Cooper—SOPA Images/LightRocket/Getty Images
The crisis strikes at the heart of the Chinese development model. The world’s most populous nation has used construction and property sales to drive economic growth over the past decade, with the property sector accounting for more than a quarter of the economy. The World Bank warned in its China Economic Outlook report last month that China needed to take “decisive steps” to “encourage a shift towards consumption” if it was to “achieve a more balanced, inclusive and sustainable growth path”.
The obstacles are not insurmountable. Huang says the real estate crisis will impact bank profits, but he doesn’t expect a system-wide calamity. He points out that down payment requirements in China are high – typically 30% for first-time buyers – meaning people are unlikely to give up mortgages unless house prices take a big drop. .
Meanwhile, Pettis believes “a combination of threats” can mitigate the problem in the short term. Authorities “can force banks to lend more to viable but unfinished construction projects,” he says. “They can threaten real estate developers to complete their projects and they can warn home buyers that a default will affect their social credit ratings.”
At the same time, he warns that attempts to find new engines of growth can be painful for an economy so dependent on booming construction projects.
“Once investment has become so excessive that it can no longer be justified economically, any attempt to reduce it causes a sharp slowdown in growth, which in turn undermines the justification for even more investment” , he said. “In this case, it’s hard not to get caught in a vicious circle, in which less investment means less growth, and less growth means less investment can be justified.”
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