Chinese home buyers are running out of patience with real estate plunging

Chinese property developers, including the heavily indebted Evergrande, have run a business based on selling apartments before they are completed. Pictured here is an Evergrande development in Beijing on January 6, 2022.

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China’s property market is in desperate need of a confidence boost, analysts say, after reports of homebuyers halting mortgage payments rocked bank shares and sparked fear of a system-wide crisis.

The size of mortgages is less worrisome than the impact of the latest events on demand and prices for one of the biggest financial assets in China: housing.

“It’s important for policymakers to restore confidence in the market quickly and break the potential negative feedback loop,” said Goldman Sachs chief economist Hui Shan and a team of analysts. Research said in a report on Sunday.

A spike in the number of homebuyers pausing their mortgage payments last week prompted many Chinese banks to announce low access to such loans. But bank stocks fell. Homebuyers protest the slow construction of the apartments they want paid on completion, as is typical in China.

“If left free, many homebuyers could stop making mortgage payments, [further] cash flow stress of real estate developers, may therefore lead to more construction delays and project halts,” the Goldman report said.

The uncertainty “diminished households’ desire to buy homes from these developers, who are believed to need the sales the most,” analysts said.

After two decades of phenomenal growth, China’s property developers have found it harder to withstand Beijing’s repression as companies rely heavily on debt for growth. Indebted developers like Evergrande Group defaulted at the end of last year.

Developers’ continued financial troubles coupled with Covid restrictions have delayed construction projects, putting homebuyers at risk to their financial credit by pausing payments. their mortgage.

According to Jefferies, the number of related real estate projects tripled in a few days to more than 100 as of July 13.

That’s 1% of all mortgage balances in China, analysts say.

The company’s financial services analysts wrote in a report last week at banks covered by Goldman Sachs, the average exposure for assets including mortgages was just 17%.

“We view this mortgage risk as more about the willingness of households to pay off the mortgage,” the report said, “as developers have built construction of properties due to difficulty in refinancing”.

But if many homebuyers refuse to pay their mortgages, bad sentiment will reduce demand – and theoretically price – in a vicious cycle.

It is a call to boost confidence.

“In the second half of 2022, there is no hope of a quick recovery in the real estate sector and it will continue to drag on economic growth,” said Gary Ng, senior economist at Natixis CIB Asia Pacific. economy”. “The antidote is to boost confidence among homebuyers and developers again, but it has proven to be a daunting task.”

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Qin Gang, deputy director of the China Real Estate Research Institute ICR, said pausing mortgage payments is a measure that should not become customary, especially since there are already legal processes in place to deal with it. delay in finishing the apartment.

He cited conversations with industry executives as saying that reports of a pay stop are very detrimental to sustaining the real estate sector’s recovery.

Typically, if developers fail to deliver apartments within the agreed-upon deadline, homebuyers can apply for termination of the sale and purchase agreement, Goldman Sachs real estate analysts said in a report last week. .

Approval typically takes three months, analysts say, and developers will need to return the down payment and completed mortgage payments to homebuyers, including interest. The remaining mortgage payments will go to banks, the report said.

Lowest home purchase plan in six years

Demand for new homes has dropped.

A quarterly survey by the People’s Bank of China in June showed that only 16.9% of people planned to buy a home in the next three months, the lowest level since 16.3% in the third quarter of 2016. .

Earlier this year, the central bank took an important step in boosting the property market by lowering mortgage rates. Many cities have eased policies in the past few months to help with homebuying.

But since April, property sales have fallen 25% or more from last year’s levels, according to Wind Information data.

The average price per 100 Chinese cities has barely increased over the past year, although prices in major cities such as Beijing and Shanghai have increased by double digits, reflecting a divergence in demand, according to Wind Information. .

Call for completion and delivery of the apartment

Bruce Pang, chief economist and head of research for Greater China, JLL, said any policy that could guarantee home deliveries would be helpful. He said banks limit their exposure to unfinished construction projects and are likely to restore market confidence.

Dai Xianglong, a former director of the People’s Bank of China, said on Saturday that China will not experience something like the 2007 US “subprime mortgage crisis”, and propose measures to boost confidence in the real estate industry and stabilize housing prices. That is according to a report by state media.

But even with state support The Securities Times last week raised the specter of systemic financial risk in an article encouraging local governments and developers to deliver homes on time.

“Credit losses associated with mortgage loans are minimal and the balances affected are small at most Chinese national banks today,” said Harry Hu, senior director at S&P Global Ratings, said in a statement.

But downward pressure could increase if the latest mortgage suspension by some groups of residents in China is not well managed and presents itself as a systemic risk, Hu said.

The official newspaper of China’s banking and insurance regulator on Sunday published similar warnings and pushed support for apartment delivery and financing for the real estate industry.

Without the drag of the real estate sector, China’s GDP could grow by 3% in the second quarter compared with the 0.4% growth reported on Friday, according to analysis by Goldman Sachs.

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