China Property & Mortgage Crisis
By Sharanya

China Property & Mortgage Crisis - An Investigative Piece on the Implications of the Boycott

October 28,2022

The property sector of China makes up around a third of its total economic output ($18 trillion GDP). It includes brokering & rental services along with houses, industries that produce white goods for the apartments, and construction materials. Yet, it is critical to note that the Chinese economy has been declining for the past few years.

The last quarter of 2022 saw only a growth of 0.4% compared to the previous year. The main reason for this can be attributed to Beijing’s zero-COVID strategy which involved repeated lockdowns and restrictions that negatively affected savings, investments, and incomes. At present, in the wake of the slow Chinese economy, home buyers are boycotting mortgage payments.

What Caused the Mortgage Boycott?

The ‘three red lines’ accounting measures introduced by the Chinese government in 2020 limiting the money developers can borrow sparked a liquidity crisis. This kept even big developers like Evergrande out of credit markets, depriving them of the cash required to complete apartments. As a result, construction that usually takes twelve to eighteen months to finish was either taking years or had stopped altogether. Buyers, nonetheless, had to keep paying their mortgage instalments since payments start with a pre-sale deposit in the Chinese market.

A letter by the purchasers of the half-built Dynasty Mansion Project to the Evergrande Group first mentioned that “all homebuyers who have outstanding mortgage loans will immediately stop paying” if the construction doesn’t resume before 20th October. It was shared across social media platforms in China and slowly became a template for various protests. Within a span of four weeks, over 320 projects in 100 countries were facing the brunt of similar protests.

The Reason Behind this Situation & the Government’s Take

The demand for homes is not rising at the moment due to the demographic change in China. The size of the Chinese economy also means that any disruption in their property market can affect the global financial system. As per recent news, around 30 real estate companies have missed foreign debt payments. One high-valued casualty is Evergrande, which defaulted on its $300 billion debt, last year.

Around 70% of personal wealth in China consists of real estate & homebuyers pay beforehand for unfinished projects. New home sales in China are made up of 70-80% of these pre-sales amounts that the developers use to fund many projects at once. However, at the moment, a big chunk of young & middle-class Chinese individuals aren’t investing in property due to job losses, pay cuts, and a weak economy. As a result, developers might not be able to complete the running projects, thereby causing the mortgage crisis.

Financial Repercussions of the Boycott

  • As per ANZ, an Australian banking group, over $220 billion worth of loans is attributed to unfinished projects.
  • As per a Bloomberg Intelligence Analyst, the halt in construction could impact around $696 billion or 4.7 trillion Yuan worth of Chinese homes. Almost 1.4 trillion Yuan or 1.3% of the country’s GDP will be required to complete construction projects.
  • S&P Global Ratings has estimated that around $356 Billion (2.4 Trillion Yuan) or 6.4% of mortgages are at risk.
  • Deutsche Bank AG has warned that at least 7% of home loans are in danger now.

Till now, the listed banks have reported delinquent mortgages of only 2.1 billion Yuan as affected by the boycotts directly.

Beijing, in this situation, is putting the onus on the local governments who are offering relief funds to the developers and tax rebates, cash subsidies, and reduced deposits to the home buyers.

What Does the Future Hold?

Analysts who have been monitoring the situation for a long time state that the reported bailout of $148 billion may not be enough and companies might need over $444 billion only to complete the currently halted projects. House sales among the 100 top developers in China dropped in July by 39.7% compared to the previous year, as per CRIC (China Real Estate Information Corp). There is a clear indication of China’s economy being at crossroads due to this crisis.