#world #worried #Chinas #housing #crisis
China’s struggling real estate sector took another hit this month when frustrated homebuyers stopped making mortgage payments on units in unfinished projects.
The boycott came with many developers struggling to deal with mountains of debt and fears the crisis could spill over into the rest of China’s — and global — economy.
How big is China’s real estate sector?
Colossal. Real estate and related industries are estimated to contribute up to a quarter of China’s gross domestic product (GDP).
After the market reforms in 1998, the sector picked up speed. There was a staggering boom in construction driven by demand from a growing middle class who viewed real estate as an important family asset and status symbol.
The bonanza was fueled by easy access to credit, with banks willing to lend as much as they could to both developers and buyers.
Mortgages account for almost 20 percent of all outstanding loans in the entire Chinese banking system, according to a report by ANZ Research this month.
Many developments are based on “pre-sales,” where buyers pay mortgages on units in projects that have yet to be built.
Unfinished homes in China total 225 million square meters (2.4 billion square feet), Bloomberg News reported.
Why did it fall into crisis?
As real estate developers thrived, so did real estate prices.
That worried the government, which was already concerned about the risk posed by indebted developers.
It launched a crackdown last year, with the central bank capping the share of outstanding housing loans in total bank lending to try to contain the threat to the broader financial system.
This choked off funding sources for developers already struggling to deal with their debts.
A spate of defaults followed, particularly from China’s biggest developer Evergrande, which is drowning in more than $300 billion in debt.
In addition to the regulatory crackdown, Chinese real estate companies have also been hit by the Covid crisis – economic uncertainty has forced many would-be homebuyers to reconsider their purchase plans.
How have home buyers reacted?
Evergrande’s demise had sparked protests by homebuyers and contractors at its Shenzhen headquarters in September last year.
In June of this year, a new form of protest emerged: the mortgage boycott.
People who bought units in unfinished projects announced they would stop making payments until construction resumed.
Within a month, the boycott spread to homebuyers in more than 300 projects in 50 cities across China.
Many of the unfinished projects were concentrated in Henan Province, where mass protests erupted and were suppressed in response to rural bank fraud.
Chinese lenders said last week the affected mortgages accounted for less than 0.01 percent of outstanding home mortgages, but analysts say the fear is how far the boycott will spread.
Why is there global concern?
China is the second largest economy in the world with close global trade and financial ties.
If the housing crisis spreads to China’s financial system, the shock would be felt far beyond its borders, analysts say.
“Should defaults escalate, there could be wide-ranging and serious economic and social ramifications,” Fitch Ratings wrote in a statement Monday.
That echoed a warning from the US Federal Reserve, which said in May that while China has so far managed to contain the fallout, a worsening housing crisis could also affect the country’s financial system.
The crisis could spread, affecting global trade and risk sentiment, the Fed said in its May 2022 Financial Stability Report.
What can China do about it?
A bailout or bailout fund for the entire property sector is unlikely even if mortgage boycotts ramp up, analysts say, as it would mean the government admitting the depth of the crisis.
A larger bailout could also encourage developers and homebuyers to proceed with risky decisions as they would see the government and banks taking responsibility.
However, pressure on Chinese banks has been building to ease the situation. China’s banking regulator said Thursday it would help projects complete and units hand over to buyers.
Some action has been taken at the local level in Henan province, where a bailout fund has been set up in partnership with a government-backed developer to help stressed projects.
Chen Shujin of Jefferies Hong Kong said local governments, developers and homeowners may also be able to negotiate interest waivers and the suspension of mortgage payments for a period of time on a case-by-case basis.
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