CHINA
ECONOMY
China’s homebuyers are running out of patience
with the real estate slump
PUBLISHED
TUE, JUL 19 20228:51 PM EDT
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Evelyn
Cheng
@CHENGEVELYN
BEIJING —
China’s real estate market desperately needs a boost in confidence, analysts
said, after reports of homebuyers halting mortgage payments rocked bank stocks
and raised worries of a systemic crisis.
The size of
the mortgages isn’t as worrisome as the impact of the latest events on demand
and prices for one of the biggest financial assets in China: residential
housing.
“It is
critical for policymakers to restore confidence in the market quickly and to
circuit-break a potential negative feedback loop,” Goldman Sachs chief China
economist Hui Shan and a team said in a report Sunday.
Last week,
a spike in reported numbers of homebuyers halting mortgage payments prompted
many Chinese banks to announce their low exposure to such loans. But the bank
stocks fell. The homebuyers were protesting construction delays for the
apartments they’d paid for ahead of completion, as is typical in China.
“If left on
its own, more homebuyers may stop paying mortgages, [further] straining
property developers’ cash flows, which in turn could lead to more construction
delays and project halts,” the Goldman report said.
Uncertainty
“dampens households’ desire to buy homes from these developers who arguably
need the sales the most,” the analysts said.
After
two decades of tremendous growth, China’s property developers have found it harder to stay afloat
under Beijing’s crackdown on the companies’ high reliance on debt for growth.
Highly indebted developers like Evergrande Group defaulted late last year.
Developers’
persistent financial troubles along with Covid restrictions have delayed
construction projects, pushing homebuyers to put their own financial credit at
risk by suspending their mortgage payments.
The number
of property projects involved more than tripled in a few days to more than 100
as of July 13, according to Jefferies.
That’s a
tiny 1% of the total mortgage balance in China, the analysts said.
Across
banks covered by Goldman Sachs, average exposure to property including
mortgages was just 17%, the firm’s financial services analysts wrote in a
report last week.
“We view
this mortgage risk to be more about households’ willingness, rather than
ability, to make mortgage payments,” the report said, “as developers have
dragged out the construction of properties given the difficulties of
refinancing.”
But if more
homebuyers refuse to pay their mortgages, the poor sentiment would reduce
demand — and theoretically prices — in a vicious cycle.
That’s
prompted calls to boost confidence.
“In the second
half of 2022, there is no hope for a quick rebound in the real estate sector,
and it will continue to drag economic growth,” said Gary Ng, senior economist,
Natixis CIB Asia Pacific. “The antidote is to boost the confidence of
homebuyers and developers once again, but it has proven to be a difficult
task.”
Halting
mortgage payments is an extreme measure that shouldn’t become a common
practice, especially since there are legal processes to address delays in
completing apartments, said Qin Gang, deputy director of China real estate
research institute ICR.
He cited
conversations with industry executives in saying reports of stopped payments
are very unfavorable for maintaining the real estate sector’s recovery.
Normally,
if developers fail to deliver apartments within the agreed period, homebuyers
can apply to terminate their purchase contracts, Goldman Sachs real estate
analysts said in a report last week.
The
analysts said approval usually takes three months and the developer will need
to return the down payment and completed mortgage payments to the homebuyer,
including interest. The remaining mortgage payment should go to banks, the
report said.
A six-year
low in house purchase plans
Demand for
new houses has already fallen.
A People’s
Bank of China quarterly survey found in June that only 16.9% of residents plan
to buy a home in the next three months, the lowest since 16.3% in the third
quarter of 2016.
Earlier
this year, the central bank took a significant step toward boosting the real
estate market by lowering the mortgage rate. Many cities have relaxed policies
in the last several months to support house purchases.
But since
April, real estate sales have fallen 25% or more from last year’s levels,
according to Wind Information data.
The average
price across 100 Chinese cities has barely risen over the last year, although
prices in large cities like Beijing and Shanghai have surged by double-digits,
reflecting divergence in demand, according to Wind Information.
Calls to
complete and deliver apartments
Any policy
that can assure the delivery of homes would be helpful, said Bruce Pang, chief
economist and head of research, Greater China, JLL. He said banks have limited
exposure to uncompleted construction projects and have the ability to restore
market confidence.
Dai
Xianglong, former head of the People’s Bank of China, said Saturday that China
would not experience something like the 2007 U.S. “subprime mortgage crisis,”
and suggested measures to boost confidence in the real estate industry and
stabilize housing prices. That’s according to a state media report.
But even
state-backed Securities Times last week raised the specter of systemic
financial risk in an article that encouraged local governments and developers
to deliver houses on time.
“Credit
losses relating to mortgage loans are minimal and the affected balances are
small at most Chinese national banks currently,” Harry Hu, senior director at
S&P Global Ratings, said in a statement.
“But
downside pressure could build if the latest suspension in mortgage repayments
by some resident groups in China is not managed well and manifest into system
risks,” Hu said.
The
official newspaper for China’s banking and insurance regulator on Sunday
published similar admonitions and pushed to support delivery of apartments and
financing for the real estate industry.
Without the
property sector’s drag, China’s GDP could have grown by 3% in the second
quarter versus the 0.4% growth reported Friday, according to Goldman Sachs’
analysis.
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