Why is the world worried about the real estate crisis in China?
China’s struggling real estate sector suffered another blow this month when frustrated homebuyers stopped making mortgage payments on units in unfinished projects.
The boycott came with many developers struggling to manage mountains of debt and fearing the crisis could spread to the rest of the Chinese – and global – economy.
How big is the Chinese real estate sector?
Colossal. Real estate and related industries are estimated to contribute up to a quarter of China’s gross domestic product (GDP).
The sector took off after market reforms in 1998. There was a jaw-dropping building boom driven by demand from a growing middle class who viewed property as a key family asset and status symbol .
The windfall has been fueled by easy access to loans, with banks willing to lend as much as possible to developers and buyers.
Mortgages account for nearly 20% of all outstanding loans across China’s banking system, according to an ANZ Research report released this month.
Many developments rely on “presales”, with buyers paying mortgages on units in projects yet to be built.
Unfinished homes in China account for 225 million square meters (2.4 billion square feet) of space, Bloomberg News reported.
Why did he plunge into crisis?
As property developers prospered, house prices also soared.
This worried the government, which was already worried about the risk posed by indebted developers.
It launched a crackdown last year, with the central bank capping the proportion of outstanding home loans to banks’ total loans in an attempt to limit the threat to the wider financial system.
This reduced the sources of funding for developers who were already struggling to manage their debts.
A wave of defaults ensued, including from China’s biggest developer, Evergrande, which is awash in liabilities of more than $300 billion.
In addition to the regulatory crackdown, Chinese property companies have also been hit by the Covid crisis – economic uncertainty has forced many would-be buyers to rethink their buying plans.
How have homebuyers reacted?
Evergrande’s decline sparked protests by homebuyers and contractors at its Shenzhen headquarters in September last year.
In June of this year, a new form of protest emerged: the mortgage boycott.
People who had bought units in still unfinished projects announced they would stop making payments until construction resumed.
Within a month, the boycott has spread to buyers from more than 300 projects in 50 cities across China.
Many of the unfinished projects were concentrated in Henan province, where mass protests in response to rural banking fraud erupted and were suppressed.
Chinese lenders said last week that affected mortgages accounted for less than 0.01% of outstanding residential mortgages, but analysts say the fear is how far the boycotts will spread.
Why is there a global concern?
China is the world’s second largest economy, with deep global trade and financial ties.
If the real estate crisis spreads to China’s financial system, the shock would be felt far beyond its borders, analysts say.
“If defaults worsen, there could be significant and serious economic and social implications,” Fitch Ratings wrote in a note on Monday.
This echoes a warning from the US Federal Reserve, which said in May that while China has managed to contain the fallout so far, a worsening housing crisis could also impact the country’s financial system.
The crisis could spread and impact global trade and risk sentiment, the Fed said in its May 2022 financial stability report.
What can China do to fix it?
A bailout or bailout fund for the entire real estate sector is unlikely, even if mortgage boycotts grow, analysts say, because it would mean the government admits the scale of the crisis.
A major bailout could also encourage developers and home buyers to continue with their risky decisions, as they would see the government and banks assume their responsibilities.
But pressure has mounted on Chinese banks to help ease the situation. China’s banking regulator said Thursday it would help ensure projects are completed and units are handed over to buyers.
Some interventions have taken place at the local level in Henan Province, where a bailout fund has been set up in conjunction with a state-backed developer to help troubled projects.
Chen Shujin of Jefferies Hong Kong said local governments, developers and landlords may also be able to negotiate interest relief and the suspension of mortgage payments for a certain period on a case-by-case basis.