China’s Desperate Bid to Avoid Worsening of Real Estate Crisis

A major crisis involving thousands of unfinished apartments across China awaits the government even as it tackles the severe Covid outbreak and tries to ward off an economic disaster owing to the strict lockdowns only recently lifted under people’s pressure.

The property loan market in the country is experiencing rising bad debts. They stand at 29 per cent of total loans this year. People are simply refusing to repay their mortgages and price declines in the existing-home market are now the sharpest in nearly a decade. With most Chinese investing all their savings in housing, the crisis may endanger livelihoods in the near future too.

The government is desperately trying to ease the panic. The China Banking and Insurance Regulatory Commission is asking banks to increase loan support for real estate developers so that they can complete unfinished projects. The government logic is once the homes are ready, the disgruntled homebuyers can be convinced to call off their mortgage boycotts.

The boycotts have rattled the country since July. The issue is, in China, real estate companies can sell homes even before they are constructed. The homebuyers have to begin repaying the loans even before they get possession of their flats, apartments or houses. The developers use the repayments as funds to finance the construction. Any chink in this cycle harms the entire process.

In the beginning of 2022 there were rumblings across China as homebuyers realised hundreds of home projects were delayed or stalled because the developers were facing a cash crunch. One of the biggest companies, Evergrande, even defaults on its debt last year. Many others sought protection from creditors.

As a result home prices began to fall. Much capital was locked in semi-finished homes where construction was stalled for months, making them unfinished flats near-worthless. Angered homebuyers refused to pay the mortgages in such a situation.

Homebuyers in nearly 50 Chinese cities across 18 provinces who had invested in these properties stopped repaying their loans. The government now wants to work closely with local government to ensure timely delivery of the unfinished projects to ensure that people start resuming payment of mortgages.

Neither the government nor the people nor even the real estate developers would have envisaged this crisis when the government created a nation-wide housing market in 1998. Till then housing sales were strictly private. There was not much demand either because much of the population lived in the villages, away from cities and towns.

As economic activity grew over the years, the urban population began to expand, by up to 500 million. This created a major commercial opportunity for real estate and construction companies who saw a bright future in home projects. Money flooded into the real estate market. The emerging middle class saw in the new homes a safe investment source. As demand for houses grew, the prices of homes shot up six-fold in over a decade.

Everybody joined in the real estate development boom. People started taking loans and dumping their entire wealth into these projects. The government was happy as well as it earned a sizeable chunk of revenue in tax.

According to media reports, the boom encouraged speculative buying, with new homes pre-sold by developers who turned increasingly to foreign investors for funds. Annual sales of “dollar-denominated offshore bonds surged from $675 million in 2009 to $64.7 billion in 2020”. The speculation “led to astronomical prices, with homes in boom cities such as Shenzhen becoming less affordable relative to local incomes than London or New York”.

To ward off any risks, the government in 2020 “tempered the inequality that unaffordable housing can create”. This led to a cash-flow crisis for the developers. The situation worsened as the Covid pandemic grew and then the Zero-Covid policy kicked in. As a result, the fund crisis tightened and many housing projects faced money crunch. Eventually many projects stalled or construction slowed down.

To control the debt of the housing industry, the government asked banks to slow the pace of mortgage lending and squeeze new financing for developers. New rules came in to reduce borrowing. Many companies failed to meet the new rules because their finances were already stretched. Some even defaulted on their offshore bonds.

Even if the industry steadies itself, it may take a while before homebuyers are in a position to honour their repayment commitments. For months, most of them were stuck at home in the lockdown period, their finances going awry as a result. And now, the virus onslaught has infected millions, again affecting their earning capacities.  They will be looking to the government to help them out of this mess.