China homebuyers across 22 cities refuse to pay mortgages

ACROSS China, homebuyers 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 Jul 12 due to project delays and a drop in real estate prices, Citigroup analysts led by Griffin Chan wrote in a research report distributed on Wednesday (Jul 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 homebuyer defaults.

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

A drop in home values hasn't helped. Average selling prices of properties in nearby projects in 2022 were on average 15 per cent lower than purchase costs in the past 3 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$117.4 billion), about 1.4 per cent of the outstanding mortgage balance, according to Chan.

A NEWSLETTER FOR YOU

Tuesday, 12 pm

Property Insights

Get an exclusive analysis of real estate and property news in Singapore and beyond.

Sign Up

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, 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 fell 3.8 per cent in the past 2 days, the worst 2-day performance since Jun 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 and Country Garden Holdings, also slumped to record lows. BLOOMBERG