Chinese home buyers are refusing to pay their mortgages: Is there a way out?

Home buyers refusing to continue repaying their loans following stalled projects by developers has gained attention in China, with the government calling on banks to extend loans for these ailing real estate companies. Will this lead to a spillover effect that will ultimately damage China’s financial system and economic stability? Zaobao correspondent Yang Danxu tells us more.
The construction site of a China Evergrande Group development in Wuhan, China, on 22 December 2021. (Andrea Verdelli/Bloomberg)
The construction site of a China Evergrande Group development in Wuhan, China, on 22 December 2021. (Andrea Verdelli/Bloomberg)

After scrimping and saving for the down payment and years of making faithful monthly repayments, some home buyers in China are no closer to getting their keys or their money back. Out of desperation, some have made a collective decision to stop repaying their loans, at the risk of being blacklisted for bad debt.

Potentially larger ramifications

This movement began in the second half of June, when developer Evergrande was unable to complete the construction of the Longting project in Jingdezhen city, Jiangxi province. The property owners issued a notice of non-repayment, stating that they would cease their housing loan repayments if construction work did not resume by 20 October.

The movement soon gained ground. According to the latest report by E-House Real Estate Research Institute, as of 16 July, at least 271 similar notices have been issued across China. These home buyers come from various regions, with the highest numbers in Henan, Hunan and Hubei provinces. Zhengzhou is at the top of the cities list, with owners in 32 projects issuing non-repayment notices.

... the risks from the non-repayment movement could spill over to become systemic financial risks.

While these home buyers are in the minority, the movement has worsened an already tottering property market, marking another upheaval in China’s property market since last year’s property debt crisis, but with potentially larger ramifications.

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Men work at a construction site of apartment buildings in Beijing, China, 15 July 2022. (Thomas Peter/Reuters)

Besides the social and livelihood issues that would ensue if buyers of stalled projects do not receive their homes or money, the risks from the non-repayment movement could spill over to become systemic financial risks.

China’s property and financial systems are closely intertwined, with property loans a major form of commercial loans for many banks. Data from the People's Bank of China show that as of the end of last year, property loans in the Chinese banking system totalled around 38 trillion RMB (US$5.6 trillion). Meanwhile, GF Securities estimates that about 2 trillion RMB worth of loans might be affected by the owners’ non-repayment.

When the property market thrives, real estate companies become a constant money-spinner; but when the market declines, the problems are exposed.

Domino effect

The non-repayment movement is closely linked to the fact that the property market is in a slump. China’s property pre-sale system, which has been implemented since 1994, has done much to resolve housing developers’ funding shortage. But many Chinese real estate companies continually borrow funds to expand, engaging in a fast cycle to get land, start construction, pre-sale, and get land again. When the property market thrives, real estate companies become a constant money-spinner; but when the market declines, the problems are exposed.

Guided by the policy that “houses are for living in, not for speculation” (房住不炒), over the past few years the authorities have implemented strict measures to moderate the property market, and rolled out the “three red lines” to control the debt of real estate companies. However, the finances of these companies have in turn tightened, making it difficult for them to reallocate resources.

With stalled projects becoming a debt crisis, the hidden risks of the high leverage, debt and turnover of the property sector are once again in full view.

... the Chinese regulatory authorities have acted much faster this time, showing that the authorities are cautious of the non-repayment movement and whether it would become a “grey rhino” event that spreads to other bank operations...

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A general view shows Evergrande residential buildings under construction in Guangzhou, in China’s southern Guangdong province on 18 July 2022. (Jade Gao/AFP)

Over the past week, the China Banking and Insurance Regulatory Commission has responded twice to the non-repayment movement. On the night of 17 July, the commission signalled that it was going to “open the taps”, asking banks to be proactive in finding solutions to mitigate the funding gap, provide credit support to qualified borrowers, and effectively meet the reasonable financing needs of real estate companies.

Compared with a year ago when the Evergrande debt crisis broke, the Chinese regulatory authorities have acted much faster this time, showing that the authorities are cautious of the non-repayment movement and whether it would become a “grey rhino” event that spreads to other bank operations, thus becoming the first domino that destabilises the financial system.

To intervene or not?

Notably, this issue of stalled projects has emerged just as both China's economy and its property market are in dire straits.

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People wearing personal protective equipment cycle on a street during a Covid-19 lockdown in the Jing'an district of Shanghai on 29 May 2022. (Hector Retamal/AFP)

Given the unpredictability of the pandemic, China’s economy is in its most difficult period since the initial outbreak in Wuhan. The 5.5% economic growth target for the year will probably not be met.

The property sector, which has always been a pillar of the economy, is at a low ebb. While various regions are loosening property regulation measures, property development investments, along with commercial property sales volume and value, have gone down across the board in the first half of the year.

It would be difficult for either the central or local budgets to fill the gaps as they are both stretched thin.

The authorities are now in a dilemma. If they intervene to resolve the problem of stalled projects, who would foot the bill?

It would be difficult for either the central or local budgets to fill the gaps as they are both stretched thin. This also means that the financial regulatory agencies need to ease up on lending and relax the previous measures aimed at deleveraging and reducing debt.

But if the authorities sternly insist on deleveraging the property sector, the problem of stalled projects will continue to fester. If the issue snowballs, the property sector will most likely experience an unsustainable shock, which would further impact the economy that is already facing difficulties in recovery, and might even lead to larger social and political risks.

evergrande
Unfinished residential buildings are pictured at the Evergrande Oasis, a housing complex developed by Evergrande Group, in Luoyang, China, 15 September 2021. (Carlos Garcia Rawlins/Reuters)

Before the 20th Party Congress commences in the second half of the year, the authorities would not want to see any signs of instability.

One industry insider said that following last year’s debt crisis, some real estate companies tussled with policies by citing their cash-strapped situation; with stalled projects suddenly becoming a problem amid the weak economic growth and the authorities especially sensitive to social stability and political risks, some developers may even hijack the policies by intentionally "lying flat".

It will be difficult to break the logic and development pattern that has been in place in the real estate industry for so many years.

Whether or not this conspiracy theory is true, the property sector has indeed long been deeply intertwined with China’s economy and society — and there has been little change to this, given the anxiety over the property market amid China’s pandemic-induced economic slowdown.

Looking at the non-repayment movement, it is not just the economy that is tied to the property sector, but also the various aspects of Chinese society. It will be difficult to break the logic and development pattern that has been in place in the real estate industry for so many years.

Related: Can China achieve a soft landing for its housing market? | How China’s housing market landed in the deep freeze | Why China is regulating the property market | Bartering garlic for homes: China’s uphill fight to revive the real estate market | Will clampdowns on China’s property sector lead to economic turmoil?