Desperate homebuyers across dozens of cities are refusing to pay mortgages on unfinished homes, according to state media reports and economists at international banks.
In China, real estate firms are allowed to sell homes before completing them, and customers have to start repaying mortgages before they are in possession of the new property. These funds are used to finance construction by the developers.
“Presales are the most common way of selling homes in China, so the stakes there are high,” Nomura analysts said in a research report on Thursday.
According to multiple state media reports and data compiled by Shanghai-based research firm China Real Estate Information Corporation (CRIC), buyers across 18 provinces and 47 cities have stopped making payments since the end of June.
“The number is still growing,” the Tianmu report said, citing statistics it had obtained from some buyers.
Nomura analysts estimate that developers delivered only around 60% of homes they pre-sold between 2013 and 2020, while China’s outstanding mortgage loans rose by 26.3 trillion yuan ($3.9 trillion) in the same period.
Experts say trouble has been brewing for a while, and it could lead to financial and social unrest.
ANZ’s senior China economist Betty Wang believes the scale of the problem is much bigger. She estimates that 1.5 trillion yuan ($223 billion) of mortgage loans, or 4% of banks’ total outstanding mortgage loans, could be affected by the movement.
“What concerns us is if more home buyers cease payment, the spreading trend will not only threaten the health of the financial system but also create social issues amid the current economic downturn,” she wrote in a report on Thursday.
The trouble in China’s real estate sector began in 2020, when Beijing started cracking down on easy credit for property firms, which has resulted in a cash crunch for many major developers.
According to the Tianmu report, buyers of an Evergrande project in Jingdezhen, Jiangxi province, fired “the first shot” in the current repayment protest.
“The Evergrande Longting project in Jingdezhen must fully resume work before October 20, 2022,” they wrote in an open letter on June 30, published on the internet and widely circulated by media. “If not, all the owners who have not paid off their loans will stop repaying the mortgage,” the letter read, adding that any loss should be borne by banks, local governments, and the developer.
“We must beware of the risk spreading from the repayment suspension for unfinished homes,” the paper said.
Homebuyers are “the most innocent,” because they are just desperate and have no way out, it said. But if the problem is not solved, it will cause further damage.
“Although financial institutions have real estate as collateral, the undelivered projects can only become bad debts. When bad debts increase, it may cause systemic financial risks,” it added.
