Chinese home buyers are running out of patience amid housing slump

Chinese property developers, including debt-ridden Evergrande, operated a business that relied on selling apartments before they were completed. Pictured is an Evergrande development in Beijing on January 6, 2022.

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BEIJING — China’s property market desperately needs a boost of confidence, analysts said, after reports of homebuyers cutting off mortgage payments rocked bank stocks and raised concerns of a systemic crisis .

The size of mortgages is not as worrisome as the impact of recent events on demand and prices for one of China’s biggest financial assets: residential housing.

“It is essential that policymakers quickly restore confidence in the market and cut the circuit of a possible negative feedback loop,” Goldman Sachs chief China economist Hui Shan and a team said on Sunday. .

Last week, an increase in the number of homebuyers having interrupted their mortgage payments prompted many Chinese banks to announce their low exposure to these loans. But bank stocks fell. Buyers were protesting delays in the construction of apartments they had paid for before completion, as is often the case in China.

“If left on their own, more buyers could stop paying mortgages, [further] straining the cash flow of real estate developers, which could lead to more construction delays and project stoppages,” the Goldman report states.

The uncertainty “dims households’ desire to buy homes from those developers who arguably need the sales the most,” the analysts said.

After two decades of meteoric growth, Chinese property developers have found it harder to stay afloat under Beijing’s crackdown on the companies’ heavy reliance on debt for growth. Highly indebted developers like Evergrande Group defaulted late last year.

Ongoing financial problems for developers as well as Covid restrictions have delayed construction projects, prompting homebuyers to put their own credit at risk by suspending their mortgage payments.

The number of affected real estate projects more than tripled in a matter of days to more than 100 as of July 13, according to Jefferies.

That’s a miniscule 1% of the total mortgage balance in China, analysts say.

Across all banks covered by Goldman Sachs, the average exposure to real estate, including mortgages, was just 17%, the firm’s financial services analysts wrote in a report last week.

“We consider this mortgage risk to be more about households’ willingness, rather than their ability, to make mortgage payments,” the report says, “as developers have delayed building properties in light of refinancing difficulties.”

But if more buyers refuse to pay their mortgages, the bad sentiment would reduce demand – and theoretically prices – in a vicious circle.

This prompted calls for confidence building.

“In the second half of 2022, there is no hope for a rapid rebound in the real estate sector, and it will continue to dampen economic growth,” said Gary Ng, senior economist, Natixis CIB Asia Pacific. “The antidote is to restore the confidence of buyers and property developers, but that has proven to be a difficult task.”

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Halting mortgage payments is an extreme measure that should not become common practice, especially since there are legal procedures to address delays in apartment completions, said Qin Gang, deputy director of the Chinese real estate research institute ICR.

He cited conversations with industry executives as saying the stop-payment reports are highly unfavorable to sustaining the real estate sector’s recovery.

Normally, if developers don’t deliver apartments within the agreed timeframe, buyers can seek termination of their purchase contracts, Goldman Sachs property analysts said in a report last week.

Analysts said approval typically takes three months and the developer will have to return the down payment and mortgage payments made to the buyer, including interest. The remaining mortgage payment should go to the banks, according to the report.

A six-year low in home buying plans

Demand for new homes has already plummeted.

A quarterly survey by the People’s Bank of China revealed in June that just 16.9% of residents planned to buy a home in the next three months, the lowest since 16.3% in the third quarter of 2016.

Earlier this year, the central bank took an important step towards reviving the housing market by lowering the mortgage rate. Many cities have relaxed policies in recent months to support home purchases.

But since April, home sales have fallen 25% or more from last year’s levels, according to data from Wind Information.

The average price in 100 Chinese cities barely rose over the past year, although prices in major cities like Beijing and Shanghai rose by double digits, reflecting the divergence in demand, according to Wind Information.

Calls to complete and deliver apartments

Any policy that can ensure housing delivery would help, said Bruce Pang, chief economist and research manager, Greater China, JLL. He said banks have limited exposure to unfinished construction projects and have the ability to restore market confidence.

Dai Xianglong, former director of the People’s Bank of China, said on Saturday that China would not experience anything like the 2007 “subprime mortgage crisis” in the United States and suggested measures to boost confidence in the real estate sector and stabilize house prices. That’s according to a state media report.

But even last week, the state-backed Securities Times raised the specter of systemic financial risk in an article that encouraged local governments and developers to deliver homes on time.

“Mortgage-related credit losses are minimal and affected balances are currently low at most Chinese domestic banks,” Harry Hu, senior director of S&P Global Ratings, said in a statement.

“But downward pressure could build if the latest suspension of mortgage repayments by some groups of residents in China is not well-managed and manifests as risks to the system,” Hu said.

The official journal of China’s banking and insurance regulator issued similar warnings on Sunday and urged support for apartment delivery and financing for the real estate sector.

Without the brake of the real estate sector, the Chinese GDP could have grown by 3% in the second quarter against 0.4% growth announced Friday, according to the analysis of Goldman Sachs.

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