China’s Housing Crisis

Unfinished construction projects, making up about 1% of China’s total mortgage balance, has prompted homebuyers to stop paying mortgages, sparking a potential 58 billion dollar increase in non-performing loans. The massive disruption to China’s property market threatens to spill into the wider financial system and may prove further problematic to China’s social stability (1) on the heels of the Henan bank protests (2).

The problem stems from China’s policy of preselling unfinished homes, which poses large risks for both developers and buyers that can consequently permeate the financial system and macro economy when projects become delayed and buyers lose confidence in purchasing new properties. Prior to the current crisis, between 2013 and 2020, only 60% of presold homes were actually delivered (3).

Credit markets have slumped as the contagion spread to suppliers and developers (4).

The PBOC, while initially reluctant to stimulate the economy further due to China’s high debt level, prompting Beijing to urge Chinese banks to step in and help stabilize the sector (5), eventually caved, contributing 30 billion yuan to a rescue fund which will support select developers. Some suspect further support by policy makers may be necessary (6).

In an effort to quell the spread of defaults, China Banking and Insurance Regulatory Commission (CBIRC) senior official, Liu Zhongrui, has assured the public that banks have everything under control and “all the difficulties and problems will be properly solved” (7).

The challenges facing China’s property market, estimated at 62 trillion dollars in total value, and therefore making it the largest asset class in the world, creates certain risks in the short-term (8), however, due to sounder monetary policies, China’s macro economic perspective remains attractive.

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References

1. More Chinese Homebuyers Refuse to Pay Mortgage Loans Amid Contagion Fears

2. Bank customers demanding their money back staged China’s largest protest in years

3. China On Verge Of Violent Debt Jubilee As "Disgruntled" Homebuyers Refuse To Pay Their Mortgages

4. "We Decided To Stop Paying": China's Mortgage Payment Boycott Spreads As Property Suppliers Refuse To Pay Their Bills

5. Beijing Panics, Scrambles To Halt Mortgage Boycott By "Urging" Banks To Rush Developer Loans

6. Beijing Cracks: Mortgage Boycott Prompts China To Launch Multi-Billion Property Rescue Fund

7. As China’s mortgage boycott revolt spreads, senior banking regulator assures steps to solve crisis

8. China Property: Is there potential here to derail things...?