Chinese developers left millions of pre-sold apartments unfinished. As a result, most Chinese banks are facing a halt to mortgage payments or in effect a “mortgage strike”—homebuyers are refuse to pay mortgages unless the developers resume construction.
Amid the real estate debt crisis, the decrease in the number of Chinese developers in the Global 500 reflect the collapsing Chinese real estate market as domestic demand and home prices fall. China Evergrande Group and two other Chinese property giants have fallen from the 2022 Fortune Global 500, reducing the number of Chinese property developers on the list from eight to five year-on-year.
According to MacroMicro, a global economic data research firm, over 327 mortgage strike notices were issued for unfinished pre-sold apartments in China as of August 13. Most of the notices accused the developers of misusing the presale funds.
China’s mortgage strike puts almost 1 trillion in bank loans at risk
Mortgage strikes pose a limited direct threat to Chinese banks. S&P Global Ratings believes the strikes point to a weakening confidence among homebuyers that could affect the sales of stronger developers. This could prolong the recovery of the property sector. Also, if there is a sharp decline in home prices, this could threaten financial stability.
Homebuyers have withheld mortgage payments for hundreds of residential projects in China, exposing some distressed developers who don’t have the means to complete the homes.
By stopping payments, China’s mortgagors are effectively pressuring banks and the government to help push developers to deliver the residences people paid for.
S&P estimates that homebuyers’ boycotts of mortgage payments could affect about 980 billion yuan ($143.7 billion) of such loans, in a base-case. This accounts for 2.5% of China’s mortgage loans, or 0.5% of total loans. On the downside, potential at-risk mortgage loans could widen to 6.4% of China’s mortgage loan book, or 2.4 trillion yuan ($352.06 billion).
The banks’ announcements so far suggest they have been only minimally hit by the mortgage boycotts. However, there is a possibility that the effects could spread. Distressed developers not hit by the boycotts may yet be targeted in the strikes. This would deter banks from providing mortgage loans to developments, effectively stopping sales in their tracks.
This, alongside tightened controls on the use of purchased funds for unfinished projects from homebuyers held in escrow accounts, would raise the risk of defaults among developers and the firms that supply and support them.
According to S&P, in China, developers typically provide guarantees on homebuyers’ mortgage loans for their unfinished projects. And China’s biggest banks provide most of the country’s mortgages as they have the lowest interest rates, and they are better able to scale up this standardized product. They also have a greater buffer for bad loans compared with some small regional banks, which tend to hold higher exposure to property developer loans.
Bloomberg reported that the rating agency projects that home sales in China could drop as much as 33 percent this year amid the mortgage strike, further squeezing developers and leading to more defaults.
Recently, many Chinese developers have resorted to bond exchanges and debt extensions to buy time in order to avoid default. However, according to S&P Global, at least 20 percent of rated Chinese developers will likely become insolvent as investors press their claims through the courts or debt restructuring.
S&P said that at the end of 2021, about 4.9 trillion yuan ($718.78 billion) of residential mortgage loans were linked to unfinished projects by developers. The estimated ratio of delayed projects to unfinished projects is 20%. This is equivalent to 0.5% of the banking sector’s outstanding loans.
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A research paper released by the National Bureau of Economic Research (pdf), an American think tank, estimated that the real estate sector constitutes 29% of China’s GDP and that a 20% fall in real estate activity could lead to a 5% to 10% fall in GDP.
In a bid to end a property downturn that played a big role in bringing year-on-year growth down to just 0.4 percent in the second quarter, the People’s Bank of China (PBOC) will initially issue about 200 billion yuan ($29.34 billion) of low-interest loans, charging about 1.75% interest a year, to state commercial banks.
Under the plan, recently approved by China’s State Council, the banks will use the PBOC loans along with their own funds, lent at market rates, to refinance unfinished real estate projects. The government hopes the banks will be able to leverage its initial fund by up to five times to raise a total of about 1 trillion yuan ($146.69 billion) and partially fill the funding gap needed to complete unfinished projects.
But bank executives and analysts have warned that the PBOC may struggle to raise its targeted amount given the difficulties banks will face in making a return on distressed real estate projects. Over leveraged developers have had to suspend the construction of millions of apartments nationwide over the past year, raising concerns of financial and social turmoil if more homebuyers withhold mortgage payments or take to the streets.
Katherine Jiang, a Hong Kong-based financial analyst, told The Epoch Times: “The real estate industry in China is in a vicious cycle—defaults have severely dampened the confidence of investors and homebuyers, resulting in limited external funding and plummeting sales.”
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Huang Jun, the chief economist at the China Enterprise Capital Alliance and a member of the Asian Real Estate Association’s research committee, explained: “Since the housing reform in 1998, China’s private real estate enterprises have grown large. But the CCP wants to regain control by turning private enterprises into state-owned enterprises.”
Huang mentioned the CCP’s long-standing economic philosophy, “state enterprises advance, the private sector retreats,” a principle that suppresses the free-market economy and bolsters state control. Since the early 2000s, the CCP has promoted state-owned enterprises at the expense of the private sector.
Rory Green, chief China economist at TS Lombard in London said: “Construction delay isn’t new.” He continued, “It’s really a tricky situation for the central authorities to manage because they don’t want too many moral hazards — or local authorities taking many property debts.” Green concluded, “On the other hand, there are social stability issues.”