China property crisis: Why homeowners stopped paying their mortgages

“Building freezes, mortgage freezes. Deliver homes and get paid back!”

That was one of the chants used by angry homebuyers in China at a protest in June. But their anger at unfinished homes didn’t stop at the signs and chants.

Hundreds of them stopped paying their mortgages – a radical move for China, where dissent is not tolerated.

A young couple who had moved to Zhengzhou in central China told the BBC that after receiving the deposit last year, the developer pulled out of the project and construction has stalled.

“I’ve imagined the joy of living in a new home countless times but now it all feels ridiculous,” said the woman, who asked not to be named.

A woman in her late 20s, who has also bought a house in Zhengzhou, told the BBC that she too is ready to stop paying her mortgage: “After the project has fully resumed, I will continue to pay.”

Many of them can pay but choose not to, unlike the US subprime mortgage crisis of 2007 when money was lent to risky borrowers who then defaulted.

According to a crowdsourced estimate on Github, where homeowners posted their decision, they’ve bought homes in around 320 projects across the country. But it’s unclear how many actually stopped paying.

The boycotted loans could total $145 billion (£120 billion), according to estimates by S&P Global. Other analysts say it could be even higher.

The revolt has shaken authorities and drawn attention to a market already under pressure from a slowing economy and a serious liquidity crisis.

Even more alarmingly, it signals a lack of confidence in one of the main pillars of the world’s second largest economy.

“Mortgage boycotts, fueled by deteriorating sentiment towards real estate, are … a very serious threat to the financial health of the sector,” think tank Oxford Economics said in a recent statement.

China’s real estate sector accounts for a third of its economic output. These include homes, rental and brokerage services; industries producing home appliances; and building materials.

But China’s economy is slowing — growing just 0.4% year over year in the most recent quarter. Some economists expect no growth this year.

That’s largely due to Beijing’s zero-Covid strategy — repeated lockdowns and continued restrictions have hurt incomes and, by extension, savings and investment.

The size of China’s economy means that disruptions in a crucial market – like real estate – can disrupt the global financial system.

Experts believe contagion is the problem now – banks won’t lend if they think the sector is faltering.

“It will all depend on politics,” says Ding Shuang, head of economic research for Greater China at Standard Chartered. “Unlike in other parts of the world where real estate bubbles burst due to the markets, this is government debt.”

Thirty real estate companies have already defaulted on foreign debt payments. Evergrande, which defaulted on its $300 billion debt last year, is the most prominent victim. S&P has warned that if sales don’t pick up, other companies could follow suit.

Demand for homes is also not increasing as China is undergoing a demographic shift in which urbanization and population growth are slowing.

“The fundamental problem is that we have reached an inflection point in the real estate market in China,” says Julian Evans-Pritchard, a senior China economist at Capital Economics.

Real estate accounts for about 70% of personal wealth in China — and homebuyers often pay upfront for unfinished projects.

These “pre-sales” account for 70% to 80% of new home sales in China, Mr Evans-Pritchard said, adding that developers need this money because they are using it to fund multiple projects at once.

But many young and middle-class Chinese are no longer investing in real estate, likely because of a weak economy, job losses and wage cuts — and now fear developers might be unable to complete projects.

“That’s part of the problem – the developers were expecting new money to come in and those new sales aren’t happening anymore,” Mr Evans-Pritchard said.

More than $220 billion worth of loans could be tied to unfinished projects, according to banking group ANZ. And loans – an important source of income during the boom years – have also dried up.

In 2020, the Chinese government introduced the “three red lines” – accounting measures to limit how much developers can borrow. This disruption in funding and the resulting lack of confidence in the market have also impacted banks’ willingness to lend to real estate companies.

For one, Beijing is putting a strain on local governments — they offer reduced deposits, tax breaks and cash subsidies to homebuyers, and grants to developers. But this comes at a cost, as local coffers will take a hit as real estate developers buy less land.

“I think this is the moment when the central government and regulators step in,” Mr Ding said. “At some point she will step in to isolate the problem some companies are having. The industry is too important for the economy.”

The Financial Times recently reported that China has lent $148 billion to help real estate developers, and Bloomberg reported that mortgage holders may be able to get a deferred payment without it affecting their creditworthiness.

But in a recent note, Oxford Economics said that any government intervention in real estate and infrastructure could provide a short-term boost, but that “it’s not ideal for China’s longer-term growth as government and the financial sector are forced to help sustain it.” an unproductive (and failing) real estate industry”.

This is not just a financial crisis either. The mortgage boycott could become a serious social problem, Mr. Ding said.

And that could become a problem for President Xi Jinping ahead of a crucial party convention later this year, when he is expected to seek a historic third term.

Analysts say the reported $148 billion bailout may not be enough. Capital Economics estimates that companies need $444 billion to complete stalled projects.

It’s also not clear whether banks – particularly smaller rural ones – can bear the cost of the mortgage strike.

Even if construction resumes, many developers may not survive as home sales are unlikely to support sentiment. Sales in China’s top 100 developers fell 39.7% in July compared to the same period last year, according to China Real Estate Information Corp (CRIC).

This crisis is the clearest indication yet that China’s economy is at a crossroads.

“The government is trying its best to find new sources of growth, but that will be a challenge as the economy has been very dependent on real estate, infrastructure investment and exports for the last three decades,” Evans-Pritchard said.

“The era of very rapid growth in China is probably over now… and this is most evident in the real estate sector at the moment.”

Additional coverage from BBC Beijing