China’s Next Big Worry: A Mortgage Crisis Knocking On Its Doors

Hundreds of thousands of homebuyers in at least 80 Chinese cities are refusing to pay their mortgages as property developers struggle to complete their building projects, signaling a new era of turbulence for China’s continued real estate crisis. 

More than 85 percent of Chinese houses are sold through presale—up from about 50 percent in 2005; mortgages begin months or even years before buildings are finished. Projects have only slowed since 2020, when the Chinese real estate market entered a protracted crisis, and developers started to struggle.

Some buyers across China have refused to pay mortgages for unfinished projects for months, but lately, it has coalesced into a group movement and a list that started with just 30 projects grew to more than 300. Mortgages aren’t as common in China as in the West: Only 18 percent of homeowners have one, and it’s more common to borrow money from extended family, who invest collectively in a property.

REUTERS/ David Kirton | Chinese regulators have urged banks to increase lending to developers so they can complete unfinished housing projects

The boycott has spread to more than 300 property projects in China as of Sunday from 200 projects last week, according to a crowdsourced document titled “WeNeedHome.” Evergrande, the world’s most indebted developer, Sunshine City, Sunac, and Kaisa are among the developers hit by the boycott.

The action has raised concerns about default risk at banks. Last week, financial regulators rushed to stamp out the broad panic over the system’s financial health by asking banks to disclose the degree of their mortgage exposure. Sixteen listed banks revealed that a small portion of loans was vulnerable to damage.

Why have homebuyers stopped repaying loans?

KEVIN FRAYER/ GETTY IMAGES | China’s economy has already recorded its lowest quarterly growth in over two years

New homes in China’s property sector are mostly sold before they are built. But when heavily indebted developers run out of cash, homebuyers are left with nothing but a debt obligation. Property giant China Evergrande, in a letter to local authorities in 2020, had said that the cash crunch could lead to huge financial and social risks. It had mentioned that two million buyers might protest over their 600,000-odd unfinished apartments in the coming years. And this is what has started happening now.

Government steps in

Banks in China are instructed to help the country’s beleaguered property developers fund some real estate projects amid a widening boycott by homebuyers who refuse to pay mortgages on unfinished houses.

BLOOMBERG/ GETTY IMAGES | A mortgage boycott in China is “still multiplying” and threatens to “become much more widespread

In mid-July 2022, the China Banking and Insurance Regulatory Commission (CBIRC) told the official industry newspaper that banks should meet developers’ financing needs where reasonable. The CBIRC expressed confidence that “all the difficulties and problems will be properly solved with concerted efforts,” the China Banking and Insurance News reported.

The remarks come as a growing number of homebuyers across China are threatening to stop making their mortgage payments for stalled property projects, aggravating a real estate crisis that has already hit the economy. The rebound in Chinese banking stocks was also aided by news that China will accelerate the issuance of special local government bonds to help supplement the capital of small banks, part of efforts to reduce risks in the sector.