Chinese home buyers in 22 cities refuse to pay mortgages

BEIJING (BLOOMBERG) – Across China, home buyers are refusing to pay mortgages as property developers drag on construction projects, escalating the country’s real estate crisis and risks of bad debt for banks.

Buyers of 35 projects across 22 cities have decided to stop paying mortgages as of July 12 due to project delays and a drop in real estate prices, Citigroup analysts led by Mr Griffin Chan wrote in a research report distributed on Wednesday (July 13).

The payment refusals underscore how the storm engulfing China’s property sector is now affecting the country’s middle class, posing a threat to social stability. Chinese banks already grappling with challenges from liquidity stress among developers now also have to brace for home-buyer defaults.

Now is “a critical time for social stability”, said Mr Chan, adding that “the forgoing of down payments may bring social instability”.

A drop in home values has not helped. Average selling prices of properties in nearby projects this year were on average 15 per cent lower than purchase costs in the past three years, according to Citigroup’s research.

The contagion is spreading to banks. Non-performing loans triggered by the wave of mortgage payment snubs could reach as much as 561 billion yuan (S$117 billion), about 1.4 per cent of the outstanding mortgage balance, according to Mr Chan.

While the overall impact on banks will be “manageable”, state lenders including China Construction Bank, Postal Savings Bank of China and Industrial & Commercial Bank of China may have more exposure to mortgages, and could suffer setbacks amid dampened investor sentiment, Mr Chan wrote.

The latest development comes at a time when renewed risks of Covid-19 restrictions also pose a threat to the industry. A key real estate index fell 3.8 per cent in the past two days, the worst two-day performance since June 13.

A Bloomberg index of China’s high-yield dollar bonds fell to the lowest in a decade as of Tuesday. Domestic bonds of large property developers, including Gemdale Corp and Country Garden Holdings, also slumped to record lows.