Why is the world worried about the real estate crisis in China?
China’s troubled real estate sector took another blow this month when frustrated home buyers stopped making mortgage payments on units on unfinished projects.
The boycott came with many developers struggling to manage mountains of debt, and concerns swirl about the possibility of the crisis spreading to the rest of the Chinese – and global – economy.
How big is the real estate sector in China?
enormous. It is estimated that real estate and related industries contribute up to a quarter of China’s GDP.
This sector took off after market reforms in 1998. There was an amazing construction boom on the back of demand from a growing middle class who considered property a major family asset and status symbol.
The boom was driven by easy access to loans, with banks willing to lend to as many developers and buyers as possible.
Mortgage loans make up nearly 20 percent of all outstanding loans in China’s entire banking system, according to a report by ANZ Research this month.
Many projects rely on “pre-sale,” where buyers pay mortgages on units on projects that haven’t yet been built.
Bloomberg News reports that unfinished homes in China total 225 million square meters (2.4 billion square feet).
Why did you fall into a crisis?
With real estate developers booming, housing prices have also gone up.
This alarmed the government, which was already concerned about the risks posed by debt-laden developers.
A crackdown was launched last year, with the central bank limiting the ratio of outstanding mortgage loans to total lending by banks in an effort to reduce the threat to the entire financial system.
These sources of funding are shrinking for developers who are already struggling to deal with their debt.
This has been followed by a wave of defaults, most notably by China’s largest property developer, Evergrande, which is sinking into more than $300 billion in debt.
On top of the regulatory crackdown, Chinese real estate companies have also been hit by the Covid crisis – economic uncertainty has forced many potential homebuyers to rethink their buying plans.
How did homebuyers react?
Evergrande’s decline sparked protests from home buyers 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 have bought units on projects still unfinished have announced that they will stop making payments until construction resumes.
Within a month, the boycott extended to home buyers in more than 300 projects in 50 cities across China.
Many of the unfinished projects were concentrated in Henan Province, where mass protests broke out in response to rural bank fraud and were suppressed.
Chinese lenders said last week that the affected mortgages represented less than 0.01 percent of existing residential mortgages, but analysts say the fear is how far the provinces will spread.
Why is there global concern?
China is the world’s second largest economy, and has deep global trade and financial links.
Analysts say that if the real estate crisis spreads to the Chinese financial system, the shock will be felt beyond its borders.
“If defaults escalate, there could be widespread and serious economic and social repercussions,” credit rating agency Fitch wrote in a note on Monday.
This echoed a warning from the US Federal Reserve, which said in May that while China has managed to contain the fallout so far, the deepening real estate crisis could affect the country’s financial system as well.
The Federal Reserve said in its May 2022 Financial Stability Report that the crisis could spread and affect global trade and risk sentiment.
What can China do to fix it?
Analysts say a bailout or bailout of the entire real estate sector is unlikely, even as the mortgage boycott escalates, as it would mean the government recognizes the scale of the crisis.
A big bailout may encourage developers and homebuyers to continue making risky decisions as they see the government and banks take charge.
But pressure is mounting on Chinese banks to help ease the situation. The Chinese banking regulator said Thursday that it will help ensure projects are completed and units are delivered to buyers.
Some intervention has taken place at the local level in Henan Province, where a rescue fund has been set up in cooperation with a state-supported developer to help stressed projects.
Chen Shujin of Jefferies Hong Kong said local governments, developers and homeowners may also be able to negotiate interest waivers and suspend mortgage payments for a certain period on a case-by-case basis.