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More Chinese homebuyers refuse to pay mortgage loans am...

Business Maverick

Business Maverick

More Chinese homebuyers refuse to pay mortgage loans amid contagion fears

Country Garden Holdings' Fengming Haishang residential development in Shanghai, China, on Tuesday, 12 July 2022. Moody's Investors Service lowered Country Garden Holdings Co. from investment-grade territory, the latest sign of how sentiment has soured for private-sector Chinese developers during the industry's cash crunch and sales slump. (Photo: Qilai Shen/Bloomberg)
By Bloomberg
14 Jul 2022 0

A rapidly increasing number of disgruntled Chinese homebuyers are refusing to pay mortgages for unfinished construction projects, exacerbating the country’s property market woes and stoking fears that the crisis will spread to the wider financial system.

Homebuyers have stopped mortgage payments on at least 100 projects in more than 50 cities as of Wednesday, according to researcher China Real Estate Information Corp. That’s up from 58 projects on Tuesday and only 28 on Monday, according to Jefferies Financial Group Inc. analysts including Shujin Chen. 

“The names on the list doubled every day in the past three days,” Chen wrote in a note published on Thursday. “The incident would dampen buyer sentiment, especially for presold products offered by private developers given the higher risk on delivery, and weigh on the gradual sales recovery.”

The payment refusals underscore how the storm engulfing China’s property sector is now affecting hundreds of thousands of average citizens, posing a threat to social stability ahead of a Communist Party Congress later this year. Chinese banks already grappling with challenges from liquidity stress among developers now also have to brace for homebuyer defaults. 

The delayed projects make up about 1% of China’s total mortgage balance, according to Jefferies. Should every buyer default, that would lead to a 388 billion yuan ($58 billion) increase in non-performing loans, Chen said. The report didn’t give any estimate for how many buyers are snubbing repayments. 

Shares of China’s banks extended their recent decline Thursday, with the CSI 300 Banks Index falling as much as 3.3%. A Bloomberg Intelligence index of Chinese developer stocks slid as much as 2.7%. 

Analysts believe that a drop in home values may be another driver for the refusal to meet mortgage payments. “Investors are concerned about the spread of mortgage payment snubs to buyers, simply due to lower property prices, and the impact on property sales,” Chen wrote.

Average selling prices of properties in nearby projects in 2022 were on average 15% lower than purchase costs in the past three years, Citigroup Inc. analysts said in a note on Wednesday. China’s home prices fell for a ninth month in May, with June figures set for release on Friday.   

The crisis engulfing Chinese developers is reaching a new phase, with a debt selloff expanding to firms once deemed safe from the cash crunch, including Country Garden Holdings Co., the largest builder by sales.

While rising non-performing loans for Chinese banks are “manageable” for now, “more risk events are likely to come, at the backdrop of China’s growth slowdown, residents’ expectation of worse future income, and shrinking property sales,” affecting China’s social stability, Jefferies’s Chen said.

Presale risks

Nomura Holdings analysts said the refusal to pay mortgages stems from the widespread practice in China of selling homes before they’re built. Confidence that projects will be completed has weakened as developers’ cash woes intensified. 

Even before the crisis, developers only delivered around 60% of homes they presold between 2013 and 2020, while outstanding mortgage loans rose by 26.3 trillion yuan, Nomura analysts including Ting Lu wrote in a note on Wednesday. 

“Presales carry mounting risks for developers, homebuyers, the financial system and the macro economy,” Lu wrote. Failure to build homes on time reduces households’ willingness to buy new properties, and rising raw material prices may mean funds from presales are insufficient to construct them. 

“We are especially concerned about the financial impact of the homebuyers’ ‘stopping mortgage repayments’ movement,” Ting wrote. “China’s property downturn may finally adversely affect onshore financial institutions after hitting the offshore high-yield dollar bond market.” BM

 

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