A fresh bout of fear has gripped China’s beleaguered property market.
Hundreds of thousands of buyers of unfinished homes have been revolting over the past few days by refusing to pay their mortgages, pushing the sector further into trouble. Suppliers to cash-strapped developers are also starting to join the boycott.
The China Banking and Insurance Regulatory Commission has acted swiftly to bring the situation under some control. It has guided lenders to open up their wallets so projects can be completed. Media reports also suggest the country may free homebuyers from any penalties to temporarily halt mortgage payments on unfinished projects.
But if the payment holiday does happen, it is a far bigger sign of trouble.
Such allowances can easily prompt more buyers to stop paying their mortgages, even for completed projects. Writing off mortgages is also not a solution as customers will lose the down payments already made to developers.
To avoid such a spiral, the government needs to act fast — and act big — on the support it can offer the industry.
So far, there has been a huge disconnect between the solutions offered by the government and the problems at hand.
By last weekend, over 200 projects across 80 cities had been impacted due to mortgage payment boycotts. Since the start of the week, the number of affected projects had grown to over 300 in 91 cities. According to industry estimates, total mortgages at unfinished projects are estimated to be around $300bn. Clearly, China is not addressing the elephant in the room.
Since the woes of the sector began to emerge in September 2021 with defaults from high-profile China Evergrande Group, both the central and local governments have been trying to introduce policies to unleash liquidity to developers.
The sector was expected to rebound from the second half of 2022. But there are no concrete signs of recovery. Rather, homebuyers’ revolt and widespread lockdowns of cities due to a new wave of Covid are only going to delay recovery.
Moving the needle
China’s property market is one of the biggest in the world, with at least 90,000 developers.
Nearly 70% of the country’s household wealth is parked in real estate, which accounts for over a quarter of China’s gross domestic product.
Even though the sector is dominated by privately owned developers, its challenges should be a top priority of the government — especially now, as none of the measures introduced so far have moved the needle for the industry.
It’s time for big moves, if only to stem the social unrest in the country. China shouldn’t shy away from a quick and strong bailout of developers, or even take over unfinished projects so that completed homes are delivered to people.
Such a move will be dramatic, but it will go a long way in breaking the vicious cycle the sector has fallen into.
The property market is suffering from a severe lack of confidence, prompting demand for houses to fall. Lower demand pushes down prices, impacting liquidity at the firms. To address the liquidity challenge, developers further cut prices to survive, which in turn, dents confidence among homebuyers. Investor pessimism around the industry is at new levels too, reflected in the sell-off of property dollar bonds in recent days.
The fact that some developers have started accepting payments in kind, such as garlic and watermelon, to perk up demand for homes should be a wake-up call to Beijing to use all the tools it may have in its toolkit to stabilise the market.
Contagion fears
Homebuyers are not the only ones feeling the pain.
Property sector exposure accounts for 30% to 40% of the loan books at banks. Land sales also constitute up to 40% of the revenues at local governments.
According to ANZ Research estimates, around Rmb1.5tr or $220bn of mortgage loans could be at risk. The government has already started censoring news around the revolts, making it harder to estimate the real damage caused to banks so far.
On top of that, poor downstream demand for steel products by developers is also wreaking havoc. Iron ore prices have dropped to below $100 a tonne, a key psychological level, according to Fastmarkets, a sister publication of GlobalCapital Asia. Global geopolitical and economic crises are also weighing down on commodities at a time when some of the biggest economies in the world face the threat of a recession.
To the optimists, the stress in China’s property sector is still different from the 2008 Lehman Brothers crisis, when a property bubble due to free lending policies in the US triggered a global financial crisis. In China, most homebuyers are still purchasing their first or second homes, given housing restrictions have been in place for years.
For many, the risks in the sector look manageable — provided the government steps in officially to stop the carnage. Assuming the capital needed to finish incomplete projects is 20% of their total value, China could require about Rmb1tr to wrap up the projects, according to ANZ.
This number is certainly not big compared to the total mortgages in the system or the social unrest it will end up causing if not dealt with rapidly. It’s time for the authorities to take serious action.