Why have Chinese homeowners quit paying their mortgages?
“Construction and mortgage payments are halted. Get paid to deliver houses!”
That was one of the slogans used by angry apartment purchasers in China during a demonstration in June. But their outrage over incomplete dwellings didn’t end with signs and chanting.
Hundreds of them stopped making mortgage payments, a bold move in China, where dissent is rarely accepted.
According to a new couple who moved to Zhengzhou in central China, the developer withdrew from the project after collecting the down payment last year, and development paused.
“I had fantasised innumerable times the thrill of living in a new home, but now it all feels absurd,” the unnamed lady added.
Worryingly, it has indicated a lack of trust in one of the world’s second largest economies.
“Mortgage boycotts, driven by worsening attitude about property, are… a very severe danger to the sector’s financial condition,” Oxford Economics said in a recent report.
Why is China’s property problem significant?
The property industry in China accounts for one-third of total economic activity. This comprises housing, leasing, and brokerage services, as well as enterprises producing white goods for apartments and building materials.
However, China’s economy has been stagnating; in the past quarter, it increased by only 0.4% over the previous year. Some economists predict no growth this year.
This is primarily due to Beijing’s zero-Covid strategy, which has resulted in repeated lockdowns and persistent limitations on income and, as a result, savings and investments.
30 brokerage firms have already defaulted on international loan obligations. The most visible casualty is Evergrande, which defaulted on its $300 billion loan last year. S&P has warned that if sales do not improve, other firms may follow suit.
Demand for housing is also not increasing as China experiences a demographic shift, with urbanisation and population growth moderating.
“The basic issue is that the Chinese housing market has reached a tipping point,” says Julian Evans-Pritchard, chief China strategist at Capital Economics.
What steps is the government taking?
For starters, Beijing is placing the burden on local governments, which are granting lower deposits, tax refunds, and cash incentives to property purchasers, as well as relief money to developers. However, this comes at a cost since local government budgets will suffer as property developers purchase less land.
“I believe that now is the time for the central government and regulators to intervene,” Mr Ding added. “It will eventually intervene to round the problem of some businesses. The industry is far too vital to the economy.”
However, Oxford Economics recently stated that while government regulation in real estate and infrastructure may provide a short-term boost, “it is not ideal for China’s longer-term growth as the government and financial sector are being forced to help maintain an inefficient (and failing) real estate industry.”
This is not only a financial catastrophe. Mr Ding believes that the mortgage boycott might become a big social problem.
And this might pose a headache for President Xi Jinping as he prepares to run for an unprecedented third term at a critical party session later this year.
