mortgage boycott in China is “still multiplying” and threatens to “become much more widespread,” according to analysts who say the homeowner protest is already affecting 235 property developments in 24 of China’s 31 provinces.
China homeowners often start paying mortgages on their new homes before construction is complete. This helps finance the property’s construction. However, many projects have been delayed.
“The boycotts appear to reflect growing concern among home buyers about the ability of indebted developers to deliver the homes they have sold, as well as some discontent about declines in new home prices, which have left many buyers sitting on paper losses,” Julian Evans-Pritchard, senior China economist at Capital Economics, said in a note on July 15.
This development may have ripple effects beyond the property industry.
China’s growing middle classes have piled their savings into property, believing it to be a safe haven for their hard-earned cash. Tianlei Huang, a research fellow 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 the total assets owned by urban Chinese households were in commercial and residential property.
On September 16th, 2021, police officers looked at crowds gathered at Evergrande’s headquarters in Shenzhen. The Chinese property giant claimed it was facing “unprecedented problems” but denies rumors it is going under.
Noel Celis—AFP/Getty Images
He points out that China has the world’s highest home ownership rate, standing at about 96% in 2020. “Given such a significant share of Chinese households’ wealth resides in property, any sharp property price corrections may trigger social instability,” he says.
Huang adds that China’s zero-COVID restrictions—which have battered the economy—have impacted both homeowners, who have lost jobs and incomes, and big developers. China Evergrande Group, a property giant, defaulted in 2021 on its debt. At least 12 other developers defaulted with offshore bonds. “Many are facing a serious cash flow crisis,” he says.
China’s property crisis
This is an enormous problem. Capital Economics estimates that construction stopped on 13 million apartment units in the past year. According to ANZ’s report, up to $220billion of mortgage loans was tied to residential projects still unfinished. The problem is only getting worse due to growing protests. Developers already in trouble will become more cash-strapped.
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In his note, Evans-Pritchard contended that developers “have drawn renewed public attention to the risks involved in purchasing unfinished homes and are likely to dampen 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 is a Senior Fellow at Carnegie Endowment for International Peace and an Associate Professor at Peking University. He claims that Chinese have been buying property in the belief that the prices will only rise over time. “That conviction has been shattered,” he says, “and we know from the history of previous property bubbles that once that happens, it is very hard to keep prices from dropping a lot more.”
Already, regulators have stepped in. According to Reuters the China Banking and Insurance Regulatory Commission has urged banks and insurance companies to provide loans for property developers in order to complete unfinished projects. Bloomberg reports that authorities may allow homeowners to halt payments on stalled projects—but only temporarily.
One of the main concerns is the possibility that the real estate sector will collapse, which would have a significant impact on the financial system. Fitch Ratings stated that an increase in defaults on mortgages is a risk for developers and banks. “Authorities are likely to step in to curb mortgage defaults from spreading more widely and to larger cities,” it predicted, “but a failure of policy intervention to restore home buyer confidence could test the banking system’s resilience and heighten liquidity pressure [for] developers.”
Pictured is a residential construction site in Changzhou Jiangsu Province, China, June 14, 2022
Sheldon Cooper—SOPA Images/LightRocket/Getty Images
The crisis strikes at the heart of China’s development model. The world’s most populous nation has used construction and property sales to drive economic growth over the last decade, with the property sector accounting for more than a quarter of the economy. In its China Economic Outlook report last month that China needed to take “decisive action” to “encourage a shift toward consumption” if it wanted to “achieve a more balanced, inclusive, and sustainable growth trajectory.”
The obstacles aren’t insurmountable. Huang says the property crisis will impact banking 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—which means that people are unlikely to walk away from mortgages unless property prices see a seriously sharp decline.
Meanwhile, Pettis believes that “a combination of threats” may ease the problem in the short term. Authorities “can force banks to lend more to viable but unfinished construction projects,” he says. “They can threaten property developers to complete their projects and they can warn home buyers that a default will affect their social credit scores.”
However, he cautions that trying to identify new growth engines could prove difficult for an economy so dependent upon construction.
“Once investment has become so excessive that it can no longer be justified economically, any attempt to reduce it causes growth to slow sharply, which in turn undermines the justification of even more investment,” he says. “In that case it is hard not to get caught up in a vicious circle, in which less investment means less growth, and less growth means less investment can be justified.”
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