China’s property sector is causing worry in economic circles as homebuyers of around 100 projects across 50 cities have decided to stop paying mortgages for unfinished homes after prolonged construction suspension.
The homebuyers are protesting developers’ failure to meet construction schedules and are demanding they resume construction and deliver projects on time, as per a report by Chinese media Caixin.
China’s economy has already recorded its lowest quarterly growth in over two years, following the impact of continued harsh Covid lockdowns under the country’s zero-Covid policy. As per the National Bureau of Statistics (NBS), the GDP expanded by just 0.4% in the three months to June 30 as compared to the same period in 2021.
Why have homebuyers stopped repaying loans?
New homes in China’s property sector get sold almost always before they are built. But when heavily indebted developers run out of cash, homebuyers are left with nothing but a debt obligation. Property giant China Evergrand, in a letter to local authorities in 2020, had said that the cash crunch could lead to huge financial and social risks. It had mentioned that two million buyers might protest over their 600,000-odd unfinished apartments in the coming years. And this is what has started happening now.
Policymakers have ordered developers to prioritise available funds on finishing projects. (AP)
What can be the impact of protests?
The protest by the homebuyers extends the risk of defaults from offshore developer bonds to banks with $6 trillion of home loans. President Xi Jinping has been making efforts to deleverage the property sector, but the emergence of the financial risk of investment in properties moving beyond three standard deviations is pushing the country into a tight spot.
How does it relate to China’s financial crisis?
In China, where property has been a key driver of growth for years, ever-rising home prices, surging household debt, and the real estate sector broadly contribute to around one-third of the country’s GDP. Last year, keeping in mind the asset price bubble, the Chinese president drew three “red lines” to restrict financing and force developers to deleverage. Following this, suddenly a lot of defaults happened, which included Evergrande as well, forcing bondholders to accept extensions or chase lawsuits.
What have the developers been asked to do now?
Understanding that potential misuse of down payments has resulted in delays in construction of properties, Chinese policymakers have ordered developers to channel available funds towards finishing projects. But, as sales continue to tank and new financing remains in short supply, construction on about 10% of homes sold in 2021 in 24 major cities has stalled. China Merchants Securities analysts have estimated that such delays could impact at least 1.7 trillion-yuan ($250 billion) worth of loans.
Chinese regulators have urged banks to increase lending to developers so they can complete unfinished housing projects. The China Banking and Insurance Regulatory Commission (CBIRC) told an official industry newspaper on Sunday that banks should meet developers’ financing needs where reasonable.
What’s the govt’s take on the issue?
Last Thursday, regulators vowed to help local governments in finishing projects timely. By Monday, the government reportedly came up with measures to allow homeowners to temporarily halt loan payments on unfinished property projects without affecting their credit scores.
“The core issue here is for the government to step in quickly to boost confidence, to solve the problem at hand, and also provide more clarity to the market and investors on how this downturn in the property sector is going to be resolved,” Hui Shan, chief China economist at Goldman Sachs Group Inc, was quoted as saying by Bloomberg.
What will China have to do to prevent further escalation?
To prevent the situation from escalating further, China will have to immediately take a call on either allowing homebuyers to delay mortgage payments or letting local governments buy off projects as Beijing’s property reset is entering a dangerous and decisive phase.
“This is a precarious moment for China’s ruling Communist Party in the run-up to its 20th party congress later this year, because it signals falling confidence in a year that was supposed to prioritise stability,” The Guardian quoted Diana Choyleva, the chief economist at Enodo Economics, a macroeconomic consultancy in London, as saying.
China’s property crisis similar to 2008 US recession?
China is set to announce its second-quarter economic growth figures later this week. Chinese data provider Wind has forecast 1.1 per cent year-on-year growth and this would be the lowest since China’s economy shrank by 6.8 per cent in the first quarter of 2020 after the Covid lockdown wreaked havoc in the country. According to analysts, real estate is the single largest component of household wealth in China, which accounts for over 70 per cent.
However, while the current financial crisis is building up stress in corporate and household sectors of the country, it is seen as unlikely that it would lead to a situation like the one seen in the United States in 2008/09 — when a mortgage crisis in the US sparked a global financial meltdown. This is because banks in China are mostly owned by the government, which has the financial resources to help them if necessary, according to Zhang Zhiwei, a chief economist at Pinpoint Asset Management.
In a recap, aggravating a real estate crisis that has already hit China’s economy, a large number of homebuyers across China have threatened to stop making their mortgage payments for unfinished property projects.
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