- Tens of thousands of people in China are refusing to pay their mortgages for unfinished apartments.
- This adds to market concerns that the country’s housing debt crisis could worsen.
- The mortgage boycott is a protest, not an inability to pay, and it increases the risk of social unrest.
The Chinese real estate market is under stress.
Property construction in China has slowed over the past two years for reasons including COVID-19-related movement restrictions and a cash crunch that has limited funding for construction activities.
Now tens of thousands of homebuyers – according to Bloomberg estimates — in China are refusing to pay their mortgages for unfinished apartments. More than 320 projects in the world’s second-largest economy are at risk of being boycotted, according to crowdsourced data on the “WeNeedHome” GitHub account.
The halt in construction activity could impact 4.7 trillion Chinese yuan, or $696 billion worth of housing in China. It would take 1.4 trillion yuan, or 1.3% of the country’s GDP, to complete the construction projects, estimated Bloomberg Intelligence analyst Kristy Hung.
All of this contributes to fears that the country’s housing debt crisis could worsen further. And, with real estate and related sectors accounting for about a third of China’s $18 trillion GDP, there are fears that the fallout from mortgage boycotts will ripple through the global economy.
Here’s what China’s mortgage boycotts are all about and why they matter.
Why are people protesting in China right now?
In China, property developers can start collecting mortgage payments before apartments are completed – which, like in many other countries, has taken longer than expected due to the pandemic.
However, Beijing began cracking down on excessive borrowing in 2020, leading to the Evergrande debt crisis last year. The industry-wide cash crunch has since spread to other developers and led to even more stalled projects, raising fears buyers may never see the apartments they paid for.
China’s once hot real estate market continued to slump. In June, house prices in China had fallen for 10 consecutive months, while disposable income was down for the fifth consecutive quarter, so households are also feeling the financial crisis.
Buyers of blocked projects are, in short, very unhappy.
“Many pre-sale home buyers are upset with developers who have run out of money to complete projects they’ve already paid for,” wrote Andrew Lawrence, Asia property analyst at TS Lombard, a consultancy based in in London.
“Many potential buyers will be watching the reaction of the authorities to this mortgage boycott, which in the short term translates into non-payment of loans and non-delivery of materials by suppliers and sales by lower-tier developers,” added Lawrence. in the note, written Thursday.
Despite pandemic curbs, in-person protests have erupted in various cities, such as a 200-person protest in central China’s Hubei province on Wednesday, The Wall Street Journal reported. Groups of buyers have also banded together to send letters threatening to stop paying mortgages until construction resumes.
It’s unclear how widespread these protests are, as censors crack down on news about mortgage boycotts.
Why have people stopped paying their mortgages in China?
Slow progress — if any — on construction projects over the past two years has angered and scared buyers who only want their homes, Bo Zhuang, senior sovereign analyst at investment management firm Loomis, told Insider. Boston-based Sayles.
“It’s not because they can’t or won’t pay, it’s a protest rather than an intentional failure,” Zhuang said of the mortgage boycotts.
Those who refuse to pay the mortgages are trying to get the attention of central and local governments – and they got it, Zhuang added. As developers use mortgage payments to fund new real estate projects, the fallout from non-payments adds to the existing cash crunch.
Regulators are considering a proposed mortgage holiday that will allow buyers of stalled projects to suspend payments without penalties, Bloomberg News reported Monday, citing people familiar with the matter.
The central government will also likely incentivize local governments to seek solutions instead of intervening directly, Zhuang said. “You can’t deploy a model for every project because every project has different issues in the field,” he added.
Solutions could include the takeover of projects by public developers, or technical solutions such as adjusting land use specifications, Zhuang said.
What’s wrong with real estate in China?
The authorities are concerned about the situation because real estate represents up to 30% of the country’s economy and up to 70% of the wealth of middle-class households.
Even so, China’s mortgage boycotts are unlikely to cause an immediate implosion of China’s banking system, as institutions’ exposures to pre-sale mortgages are low, Zhuang said.
Financial services firm Morningstar estimates that the profits of China’s top 16 commercial banks have been hit by 2.4%, even in a scenario where authorities do not intervene to ensure buyers get their apartments.
“We believe that the mortgage problems will be small in scale and will not pose significant threats to the financial system, because the root cause of this problem is not a sharp deterioration in household balance sheets, but fear of liquidity. promoters,” Iris Tan, a senior equity analyst at Morningstar, said last week.
However, a prolonged liquidity shortage lasting three to five years could strain the financial system and affect foreign debt payments, Zhuang added.
Why are the protests in China so important – and what are the potential dangers?
Given that pre-sales accounted for 90% of all property sales in China in 2021, there are fears that mortgage boycotts could further undermine confidence in the country’s property sector.
“If end buyers withdraw from pre-sale contracts, preferring instead to acquire completed projects or wait for lower prices, then wholesale liquidation or reorganization of developers will be necessary. The response of the authorities to this boycott is therefore one of great importance,” wrote Lawrence of TS Lombard.
Boycotts are also more than a financial event. They are bad for optics and increase the risk of social unrest at a sensitive time for the Chinese Communist Party, which will hold its 20th national congress in the fall when President Xi Jinping is expected to serve his third term.
After all, as Zhuang said, “this year is supposed to be a year of stability, but it turned out not to be a year of stability.”