As construction is delayed, Chinese buyers refuse to pay mortgages

Across China, homebuyers are refusing to pay mortgages as property developers drag on construction projects, deepening the country’s housing crisis and bad debt risks for banks.

Buyers at 35 projects in 22 cities have decided to stop paying mortgages starting July 12 due to project delays and a drop in house prices, analysts at Citigroup Inc. led by Griffin wrote. Chan in a research report distributed Wednesday.

The denials underscore how the storm engulfing China’s real estate sector is now affecting the country’s middle class, threatening social stability. Chinese banks already struggling with liquidity problems at developers must now also prepare for homebuyer defaults.

Read also | Chinese farmers pay for their homes with watermelons and peaches: report

Now is “a critical time for social stability,” Chan said, adding that “forgoing installments can lead to social instability.”

A decline in home values ​​has not helped. Average sale prices for properties in nearby projects in 2022 were on average 15% lower than purchase costs over the past three years, according to Citigroup research.

The contagion is spreading to the banks. Non-performing loans triggered by the wave of mortgage repayments could reach up to 561 billion yuan ($83 billion), or about 1.4% of the outstanding mortgage balance, according to Chan.

While the overall impact on banks will be “manageable”, state lenders, including China Construction Bank Corp., Postal Savings Bank of China Co. and Industrial & Commercial Bank of China Ltd., could be more exposed to loans mortgages and could face setbacks amid investor sentiment, Chan wrote.

The latest development comes at a time when renewed risks of Covid restrictions also pose a threat to the industry. A key real estate index has fallen 3.8% in the past two days, the worst two-day performance since June 13.

A Bloomberg index of high-yield Chinese dollar bonds fell to a decade low on Tuesday. National bonds of major property developers, including Gemdale Corp. and Country Garden Holdings Co., also fell to record lows.

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