Home buyers don’t want to pay mortgages on unfinished housing projects. The authorities encourage banks to offer loans to builders to finish the works. It also poses risks to the banking system: a mix that threatens the communist government.
Rome () – The debt problems of Chinese real estate developers began last year when the crisis of the giant China Evergrande broke out. Following the bank run in Henan, insolvent construction companies sparked a nationwide wave of protests. Faced with unfinished buildings and delays in deliveries without a defined deadline, home buyers announced that they were suspending mortgage payments.
The trend is spreading across the country and has prompted regulators to ask banks to increase loans to homebuilders.
But buyers of more than 300 housing projects in 91 Chinese cities have decided to boycott mortgage payments, threatening to spread the housing crisis to the banking system. Home buyers have lashed out at unfinished housing projects involving major Chinese real estate companies such as Evergrande and Greenland.
Most of the unfinished housing projects are in Henan, where authorities earlier this month cracked down on protests by victims. According to various media reports, local authorities have manipulated the “health code” of the Covid monitoring system for buyers of unfinished homes to prevent possible protests. The provincial administration also applied this technique to current account holders of local banks in crisis who wanted to withdraw their deposits.
Under current Chinese real estate regulations, when indebted builders are unable to complete projects, home buyers are still forced to pay the mortgage. Analysts point out that the turmoil in the real estate sector affects the middle class and threatens social stability, because home buyers go out on the street and default on their loans.
On July 14 in Xi’an, Shaanxi, hundreds of homebuyers protested in front of the local headquarters of the Banking and Insurance Control Commission. The authorities censored the protest on social media and in the national media. Protesters accuse banks and regulators of not supervising builders.
According to the World Bank, real estate investments in China covered 13% of GDP in 2021. Taking into account the supply chain, the percentage reaches 30%. Chinese families often focus all their efforts on buying a house. A survey by the Central Bank of China shows that 70% of the assets of Chinese families consist of real estate, while the mortgage is the main component of their debts.
With economic stagnation and a obsession with high unemployment, Chinese confidence in the real estate and banking markets is crumbling. The idea of refusing to pay the mortgage is growing like an avalanche and this type of discussion has become a sensitive topic on social networks.
Financial analysts say unfinished buildings and bank runs have sparked rare protests that could challenge ahead of the 20th Communist Party of China Congress next fall, when Supreme Leader Xi Jinping is expected to win his third term.
Those who refuse to repay loans will be blacklisted by the social credit system. The “insolvent” could be denied access to banking services and barred from taking high-speed trains or planes. Experts say homebuyers have paid down their life savings and are choosing to “default” because they have no other alternatives.
Evergrande’s collapse has already shown the consequences: lending institutions have suffered from bad loans; sporadic protests by customers and homebuyers broke out; construction workers have not been paid and suppliers have gone bankrupt. According to a Bloomberg report, at least 24 of the major Chinese real estate companies are on the verge of collapse. The market in the sector is going through a period of stagnation. Official statistics show that home sales fell by 31.8% year-on-year in the first half of 2022.
At the end of 2021, the total area of unfinished buildings in 24 major cities was 25 million square meters, or 10% of the area under construction sold. The banking regulatory authority has encouraged credit institutions to offer loans to builders. According to Bloomberg, the authorities could allow home buyers to delay their mortgage payments without hurting their social credit in order to stabilize the market.
Analysts point out that the temporary measures to stimulate the real estate sector were adopted to ensure social and economic stability before the 20th Party Congress. Systematic risk still lurks if discontent continues to grow and more and more people take to the streets to protest. The game of borrow and build has come to an end.