While addressing the severe Covid outbreak and attempting to prevent an economic catastrophe brought on by the strict lockdowns that were only recently lifted in response to public pressure, the government is still facing a serious crisis involving thousands of unfinished apartments throughout China.
The country’s real estate loan market is seeing an increase in bad loans. They currently account for 29% of all loans this year. People are just refusing to pay off their mortgages, and existing housing market price losses are now the sharpest in almost a decade. Since the majority of Chinese spend all of their resources on housing, the problem may soon jeopardise people’s ability to support themselves.
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 who had invested in these homes in roughly 50 Chinese cities across 18 provinces ceased making loan payments. In order to ensure that people start making their mortgage payments again, the government now intends to collaborate closely with local government to guarantee the timely delivery of the unfinished projects.
When the government established a national housing market in 1998, neither the government nor the people nor even the real estate developers could have foreseen this problem. Before that, all real estate transactions were private. Due to the fact that a large portion of the population resided in rural areas far from cities and towns, there was also little demand.
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.
The government requested banks to reduce fresh financing for developers and slow down mortgage lending in order to manage the debt of the housing sector. To cut down on borrowing, new regulations were implemented. Due to their already strained finances, many businesses were unable to comply with the new regulations. Some even had their offshore bonds default. Even if the market stabilises, it can take some time before homebuyers are able to honour their payback obligations. The majority of them were stranded at home during the lockdown for months, which had a negative impact on their finances. And now that millions have been infected, the virus onslaught is once more impacting their ability to earn a living. For assistance in getting out of this problem, they will be appealing to the government.