China’s real estate market is enduring another crisis as homebuyers across the nation are refusing to pay mortgages and builders lag on construction projects. Meanwhile banks are absorbing the hit as one more form of bad debt emerges to threaten their bottom line.
As of July 12, experts have counted 35 projects in 22 cities where home-buyers have simply decided to stop paying their mortgages due to delays in their home’s construction and rapidly dropping real estate prices. Citigroup Inc. analysts led by Griffin Chan examined the issue in a research report released Wednesday.
The payment refusals are a harbinger of greater social instability, as they show a middle class in China which is now beginning to violate social norms as they feel the society is cheating them. Meanwhile Chinese banks which were already facing issues from liquidity stresses among developers now face home-owner defaults from the other side.
Griffin Chan wrote that now is, “a critical time for social stability,” and that, “the forgoing of down payments may bring social instability.”
In China real estate values have dropped substantially, with selling prices of nearby projects averaging 15% lower after 3 years than the purchase cost, according to Chan’s research. As a result homeowners who purchased homes and are awaiting construction are dismayed to see their home depreciate before it is even built, so they are walking away from their mortgages.
That in turn is now affecting banks as these non-performing loans are estimated to reach as much as US$83 billion in value, or about 1.4% of total outstanding mortgage balances.
While Chan assesses the overall effect on banks as “manageable,” Chan notes that specific lenders handling the mortgages, such as China Construction Bank Corp., Postal Savings Bank of China Co., and Industrial & Commercial Bank of China Ltd., may endure greater stresses due to increased exposure, and could suffer setbacks as investors begin to pull back.
Shares of Postal Savings bank dropped 3.3% as of 2PM in Shanghai, ICBC dropped 2%, and the CSI300 Banks Index was down as much as 2.7%. That is the biggest drop since April 25th.
It is worth noting that for Chinese banks overall the non-performing loan ratio of mortgages is lower than the norm of other forms of lending. At China Construction Bank, the residential mortgage rate of non-performing loans is only 0.2%, compared to 1.42% for loans overall.
Meanwhile increasing cases of Covid are frightening investors with the threat of more lockdowns, meaning less construction and fewer sales. A central real estate index dropped for its third day in a row Wednesday, as it approached the lowest level seen since March.
Elsewhere, large property developer’s domestic bonds, including Gemdale’s, and Country Garden Holding’s also dropped to record lows.
