Why more and more Chinese are stopping their mortgage payments and causing concern around the world

Why more and more Chinese are stopping their mortgage payments and causing concern around the world

That was one of the cries of disappointed homebuyers in China at a protest in June. But her anger at the unfinished lots didn’t stop with gestures and chants. Hundreds of them stopped making their mortgage payments a radical step in that direction Chinawhere dissenting opinions will not be tolerated.

A young couple who had moved to Zhengzhou in central China told the BBC that after receiving the advance payment last year, the construction company pulled out of the project and construction stopped.

“I’ve imagined the joy of living in a new house countless times, but now it all seems ridiculous,” said the woman, who asked not to be named.

  • Why is the world concerned about China’s housing crisis?

Another woman in her early 20s, who was also buying a home in Zhengzhou, told the BBC she was ready to stop making mortgage payments: “Once the project fully resumes, I will continue paying.”

Many of them can afford it but choose to stop, unlike the US subprime mortgage crisis of 2007, when the money was lent to people who later couldn’t pay back their debts.

In China, these people bought homes in about 320 projects across the country, according to a crowdsourced estimate on Github, where homeowners have posted about the decision to stop paying. But it’s unclear how many actually quit.

The boycotted loans could total $145 billion, according to an estimate by S&P Global. Other analysts say the number could be even higher.

The uprising has shaken officials who have turned their attention to a market already under pressure from a slowing economy and a severe financial crisis. Even more alarmingly, it signals a lack of confidence in one of the main pillars of the world’s second largest economy.

“Mortgage boycotts, fueled by deteriorating real estate sentiment, are…a very serious threat to the financial health of the sector,” said Oxford Economics, a think tank, in a recent note.

Why is the real estate crisis in China worrying?

China’s real estate sector accounts for a third of the country’s economic output. These include housing, rental and brokerage services, as well as industries that produce household appliances that are processed into homes and building materials.

But China’s economy is slowing growing just 0.4% year over year in the most recent quarter. Some economists expect stagnation this year. This is largely due to Beijing’s Covidzero strategy constant lockdowns and isolation restrictions have taken a toll on income and, by extension, savings and investment.

The size of China’s economy means that a crisis in a key market like real estate could have repercussions on the global financial system. Experts believe contagion is the current concern banks won’t lend if they think the sector is going down.

“Everything depends on politics,” says Ding Shuang, head of economic research for Greater China at Standard Chartered. “Unlike other parts of the world where real estate bubbles burst because of the markets, here it is because of the government.”

Thirty real estate companies have already failed to pay their foreign debt. Evergrande, which defaulted on its $300 billion (R$1.5 trillion) debt last year, is the most prominent. S&P has warned that if sales don’t pick up, other companies could follow suit.

Demand for housing is also not growing as China is undergoing a demographic shift, with urbanization and population growth slowing.

“The bottom line is that we have reached a turning point in the real estate market in China,” says Julian EvansPritchard, senior economist at Capital Economics in the country.

How did we get to this point?

Real estate accounts for about 70% of personal wealth in China and homebuyers often pay upfront for unfinished projects.

These “presales” account for 70 to 80 percent of new home sales in China, EvansPritchard said, adding that home builders need the money because they’re using it to fund multiple projects at once.

But many young and middleclass Chinese are no longer investing in real estate, likely because of a sluggish economy, job losses and wage cuts and now fears builders won’t complete projects.

“That’s only part of the problem the builders were expecting new money to come in, and those new sales aren’t happening anymore,” EvansPritchard said.

More than $220 billion in loans could be tied to unfinished projects, according to banking group ANZ. And loans an important source of income during the boom years have also dried up.

In 2020, the Chinese government introduced the “three red lines” accounting measures to limit how much homebuilders can borrow. This cut off of funding and the resulting lack of confidence in the market also affected banks’ willingness to lend to real estate companies.

What is the government doing?

On the one hand, Beijing is putting a strain on local governments they offer reduced loans, tax breaks and cash grants to homebuyers, and support funds to builders. However, this comes at a cost as local coffers are hit as developers buy less land.

“I think this is when the central government and regulators step in,” Ding said. “Eventually he will intervene to isolate the problem of some companies and avoid contagion. The industry is very important for the economy.”

The Financial Times recently reported that China has lent $148 billion to support the real estate sector, and Bloomberg reported that mortgage holders can receive a payment without hurting their credit scores.

But in a recent note, Oxford Economics said that any government intervention in real estate and infrastructure could provide a shortterm boost, but that it is “not ideal for China’s longterm growth as government and the financial sector are forced to help an unproductive ( and bankrupt) real estate sector”.

This is not just a financial crisis. The mortgage boycott is in danger of becoming a serious social problem, Ding said.

And that could become a problem for President Xi Jinping ahead of a crucial party convention later this year, where he is expected to seek a historic third term.

Analysts say the potential $148 billion bailout may not be enough. Capital Economics estimates that companies need $444 billion to complete deadlocked projects.

It is also unclear whether banks especially smaller rural ones can bear the costs of the mortgage strike.

Even if construction resumes, many builders may not survive as home sales are unlikely to sustain the loss. According to China Real Estate Information Corp. (CRIC), sales at China’s top 100 developers fell 39.7% in July compared to the same period last year.

This crisis is the clearest indication that China’s economy is at a crossroads.

“The government is doing its best to find new sources of growth, but that will be a challenge as the economy has been heavily dependent on real estate, infrastructure investment and exports for the past three decades,” EvansPritchard said.

“The era of very rapid growth in China is probably over… and this is most evident in real estate at the moment.”

Additional coverage from BBC Beijing.