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China Mortgage Revolt May be Death Blow for Private Builders

The mortgage boycott – said to now affect over 200 projects and 80 developers – is a grave threat to private builders who relied on apartment pre-sales, as many lack funds and face a rocky future


Some of China's state banks and asset managers are refusing to rescue distressed property companies because of the debts they will incur, sources say.
Beijing's efforts to bail out the property sector are being hampered by many banks' reluctance to be left with major debts on their balance sheets. This file photo shows an Evergrande housing complex in Huaian, Jiangsu province, by Reuters.

 

The threat by Chinese homebuyers to stop paying mortgages on unfinished housing projects could transform the country’s property sector.

The move – said to now affect more than 200 projects and 80 property developers – is a blow to cash-starved developers who have long relied on pre-sales of apartments, as many of these companies lack funds and already face a rocky future.

Homebuyers are responding not just with protests and threats of mortgage boycotts but by taking their business to deep-pocketed state-owned developers, or insisting only on buying completed apartments.

This shift in behaviour looks set to reshape China‘s property sector, analysts and developers say, while many private companies, who last year sold as much as 90% of new housing units before construction was complete, may not survive the transition.

“It’s a vicious cycle. If homeowners stop repaying mortgages … property recovery will be impacted,” ANZ senior China economist Betty Wang said, adding that buyers of unfinished projects may baulk not only because of construction delays, but also falling home values as the market softens.

Uncertain job and financial prospects in the lagging economy and environmental issues have also stirred the agitation for mortgage boycotts.

 

ALSO SEE: China Mobilises Banks to Battle Widening Mortgage Boycott

 

A Sector in Crisis

The disruption comes at a sensitive time for China‘s property sector, which accounts for a quarter of the country’s economic output and showed signs of stabilising in June when prices were unchanged after falling for two months.

The sector has been lurching from one crisis to another over the past year, as it grapples with mounting liabilities, a slowing economy and flagging demand, while its sources of fresh fundraising have been drying up.

Some private developers have already defaulted on offshore debt obligations and struggled to raise funds from other sources, including banks.

“It’s a domino effect: No new homebuyers will buy our unsold apartments in the pre-sale, but we need to use the little money we get from selling half or two-thirds of the units to complete construction,” said an executive at a private developer that has missed its dollar bond payments but has not halted construction.

The executive declined to be named due to the sensitivity of the matter. “After repaying bank loans with the money left, if there is any, it’s almost impossible also to repay the onshore and offshore bonds.”

 

Project Delays

Estimates vary widely on unfinished projects, with analysts contacted by Reuters putting the figure at 5% to 20% of projects nationwide.

ANZ estimates that 1.5 trillion yuan ($222 billion) worth of mortgages are tied to apartments at risk of remaining unfinished, or 4% of total outstanding mortgages.

China‘s banking regulator repeatedly sought to reassure homebuyers and financial markets over the past week that pre-sold homes would be properly delivered, while encouraging lenders to provide funds as needed to worthy real estate projects.

State-owned developers have also taken over some troubled projects from heavily indebted non-state companies, and some analysts and sector players expect stepped-up takeovers to address the mortgage protests.

But the mortgage repayment revolt has reached an unprecedented scale, with more than 200 projects by at least 80 property developers affected across China, E-house China Research and Development Institution said in a report this week.

The turmoil is expected to accelerate changes already evident in the preferences of homebuyers, who have long favoured new properties still on the drawing board or under construction but grew wary of unfinished projects as high-profile developers – notably China Evergrande Group – plunged into a debt crisis over the past year.

The ratio of pre-construction sales to sales of existing homes has dropped to 6.5 from a high of 9.9 in the first half of last year, according to ANZ.

Homebuyers are also leaning towards more financially secure, state-owned developers.

Jason Li, a 30-year old would-be homebuyer in eastern China‘s Shangdong province, said he was delaying buying a home because he is worried about the economy and job security, and said he would avoid projects by private developers.

“It took a few years for my friends to finally get their pre-sold homes, while many developers even failed to deliver the apartments as promised,” said Li.

Moody’s added in a report that the boycott would accelerate the shakeout of struggling developers.

“The rise in mortgage defaults … will further differentiate financially strong developers from their weaker peers,” it said.

 

  • Reuters with additional editing by Jim Pollard

 

ALSO SEE:

China Stocks Plunge as Homebuyers Refuse to Repay Loans

 

China Property Loans Grow After Bank Curbs Loosened

 

Jim Pollard

Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd papers in Sydney, Perth, London and Melbourne before travelling through SE Asia in the late 90s. He was a senior editor at The Nation for 17+ years and has a family in Bangkok.

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