China’s Snowballing Mortgage Crisis

Homebuyers refuse to pay loans for stalled construction projects . . . 

A rare ‘mortgage boycott’ in China that started to gain attention last week has quickly grown in size and scope. Frustrated homebuyers across the country posted open letters through social media informing their local governments, housing authorities, and lender banks that they will be withholding mortgage payments. Developers facing the protests, including big names such as Sunac and Evergrande, have failed to complete and deliver pre-sold apartments on time, and, in some cases, have stalled construction for months. The movement, believed to have begun in late June in a small city in central China, has now spread to 91 cities and, by Monday, reportedly involved over 300 projects.

Home-buying pitfalls and protests . . .

The speed with which this crisis has evolved speaks to an underlying vulnerability in China’s model of funding real estate projects. Unlike in Canada, where buyers of pre-sale units only start making mortgage payments when the property is built and in their possession, homebuyers in China begin making monthly payments while construction is still in process. While funds from homebuyers form a stable source of financing for developers, homebuyers often have to save up for years and set aside a significant portion of their incomes to service these payments. When projects are not completed, buyers often need to go through complicated processes to recoup their investments. The current mortgage boycott over unfinished residential buildings, known as “rotten tail buildings,” is the largest nationwide community action on this issue China has seen.

Spiralling into financial woe?

Soon after the movement began online, China’s 'Big Five' state-owned banks and several major private commercial banks described their exposure to mortgage-payment risk as "manageable." However, the possibility of a mortgage default involving an estimated several hundred billion dollars has put authorities on high alert. Last Sunday, the China Banking and Insurance Regulatory Commission, the country’s top banking watchdog, urged banks to work with cash-strapped developers to fill their funding gaps. Logging just 0.4 per cent GDP growth in the second quarter, Beijing’s tasks of avoiding a larger financial fallout from this mortgage boycott and maintaining social stability will definitely be challenging.