The crisis in China over middle-class homeowners refusing to pay mortgages for properties that developers have failed to deliver has now spread over 301 development projects in about 91 cities. As homeowners accuse developers of failing to deliver apartments they paid for, the total value of the mortgages affected has surged to an estimated 2 trillion yuan, or US$297 billion.
Alfred Wu, an associate professor at the National University of Singapore’s Lee Kuan Yew School of Public Policy notes, “Chinese homebuyers usually pool the whole family’s resources to buy a home. It is a life-and-death matter for them if their homes become negative assets.”
For President Xi, the timing is inconvenient. He has just reined in overleveraged property developers, triggering bond defaults that have shocked global investors, and brought at least 24 leading developers to the brink of collapse. That has wiped nearly $80 billion from the offshore bond market.
Now, just as he is coming up on a once-every-five-years Communist Party meeting, where he will need to secure his third term in office, he faces a revolt from middle-class homebuyers which is simultaneously pressuring yet more property developers. Meanwhile the pressures from that are affecting the banks which have paid for the properties, and now expect to receive mortgage payments that will support their operations. Moreover the case for Xi’s leadership rests upon how he has helped achieve “common prosperity” for average citizens, which is the foundation of the legitimacy of one-party rule in China.
This has left Xi looking for a way to ease the pain for everyone. On Monday, Bloomberg reported that China is looking at allowing homebuyers to temporarily suspend payments for mortgages on properties that have yet to be completed, without incurring any penalties. It will be part of a broader program, which will include having local governments and banks help allay funding shortages of developers.
Chi Lo, senior Asia Pacific investment strategist at BNP Paribas Asset Management notes, “It’s the first time we’ve seen this type of mortgage boycott in China and it’s clearly caught Beijing’s eye. It’s crucial that Xi preserves stability before the 20th party congress.”
While the overall percentage of boycotted mortgages is still low, the sudden escalation of the protests has sparked fears that broader unrest could flare over the mixture of stalled real estate projects, and the rapidly falling prices in China’s declining real estate market.
Analysts note that even if Xi manages to alleviate the discontent now, longer-term risks will remain. As the real estate sector declines and families see property prices decline in value, often before they have even received the property they purchased, the government’s strict Covid-19 policies pose a continual threat to the rest of the economy, which is on pace to fall quite short of the government’s 5.5% growth target.
Other sources of societal discontent are growing as well. China is seeing growing protests over various social issues in recent months. During the Shanghai lockdowns, there were growing instances of protests linked to the Les Miserables anthem, “Do You Hear the People Sing?” Then there was the case of a mother of eight who was found chained by the neck, which raised protests over the issue of trafficking of women. Months later video of female diners at a restaurant being violently attacked triggered yet more anger at local authorities, who were seen as not responding to the issue.
Zixue Tai, an associate professor at the University of Kentucky who has researched social activism in China says many Chinese protests are specifically targeted as certain issues, like a specific scam, or one incident which the people want addressed, and thus are self-limiting. However he noted an increase in protests which appeared to be, “some sort of spontaneous release of pent-up popular rancor with the Xi administration.”
Tai continued, “Not directly confronting the national regime has allowed these protests to continue up to this point. From the perspective of the national government, it is probably safer to let the general public vent it out to a permissible degree than suppressing citizens’ voices.”
China’s property market possesses unique systemic risks, which bear monitoring closely. Having at one time been called, “the most important sector in the universe,” real estate has been declining under, among other issues, a clampdown that initially targeted only a handful of over-leveraged borrowers, like the China Evergrande Group. However issues of overleveraging have spread now to several major developers, and as more firms collapse, the financial pressures are shifting to the banks which support the industry, and the local governments who have become dependent upon the revenues produced for them by property sales.
According to Travis Lundy, an Asia markets veteran and independent analyst on the investor research platform Smartkarma, it is expected now that local governments will handle the current crisis, stepping in and taking minority stakes in projects in return for covering funding shortfalls through special-purpose bonds.
Authorities have been warning of the importance of delivering properties to buyers, even as the real estate sector was brought to its knees by record delinquencies. The majority of boycotted mortgages are now associated with projects where the developers have defaulted. It has been estimated that China Evergrande Group alone accounts for up to 35% of the total.
Andrew Collier, a managing director at Orient Capital Research Inc. said, “If thousands of homeowners believe that their largest asset is in trouble, they could protest as individuals across China, creating a ‘systemic’ political crisis.” He went on to note that the central bank is “dodging between support for the property industry and isolated acts of pain to curtail the property bubble. It’s a dangerous dance.”
