China’s mortgage boycott is the tip of the iceberg

CHINESE property developers are desperate to recover from the prolonged zero-Covid lockdowns, but the mortgage boycott has complicated matters. When analysing the impact of the mortgage boycott which started in China a few weeks ago, it is easy to conclude that Chinese property developers are not out of the woods yet and, most importantly, the problems of China’s real estate sector are wider than the defaults we have seen from developers and are structural, not cyclical.

Since the fall of Evergrande last summer, homebuyers have taken centrestage in China’s real estate sector. The reason is that developers rely on pre-sales funding from homebuyers, but regulations and Covid restrictions have led to a rupture in the capital chain. Based on the public database, the home completion delay from the agreed schedule has reached 14 months. There are 821,000 units and the mortgage exposure, according to our estimations, could reach 735 billion renminbi (S$150 billion) or 2 per cent of total mortgages. As this is only part of the unfinished projects, it is important to estimate the likely maximum loss if all unfinished projects end up in mortgage boycotts. Our estimate is 2.3 trillion renminbi or 6 per cent of total mortgages.

The mortgage boycott can have a domino effect on other stakeholders, namely property developers, supply chains, banks, and the government. Defaulted developers will suffer the most as their unfinished projects are behind almost all mortgage boycott cases, including Evergrande, Sunac and Greenland. In other words, homebuyers have lost confidence in the completion of new housing projects and may prefer existing homes.