In September 2021, a video showing the simultaneous demolition of 15 high-rise buildings in China went viral. The buildings which had remained unfinished were demolished in 45 seconds, much like the dreams of scores of home buyers in China who are today undertaking mortgage boycotts to express their anger at not getting possession of their dwelling units on time. This crisis comes at a time when official data shows that China’s economic growth has slowed sharply in the second quarter of the year, highlighting the colossal impact of the countrywide Covid lockdowns and casting doubt on whether its pre-ordained growth target can be met. China’s economy is also facing fresh risks from an unfolding mortgage boycott quickly spreading across the country. Data released by the Statistics Bureau (July 2021) shows that output had contracted by 2.6 per cent between April and June compared with the previous quarter. On an annual basis the economy grew 0.4 per cent in the second quarter, the worst since the pandemic-hit in 2020, but even that was worse than the consensus forecast by economists of 1 per cent.
Even assuming the Chinese government does some juggling with the figures, it’s hard to see how the government’s target of ‘around 5.5 per cent growth this year can be achieved. That would require a huge acceleration in the second half of 2022, which is unlikely. Official GDP figures will probably reach a growth of 3-4 per cent this year. A more significant sign lies in the latest unemployment data. China’s Statistics Bureau reported that youth unemployment has risen to 19.3 per cent, a trend accelerated by the full or partial lockdowns imposed in major centres across China in March and April, including the commercial capital, Shanghai. Rapid economic recovery seems unlikely given China’s insistence on ‘Zero Covid’ and the recent discovery of the highly transmissible Omicron sub-variant BA.5. In addition, the country’s property market is in a deep slump. The slowdown comes after China’s biggest city, Shanghai, was sealed off for two months, as it battled a Covid-19 resurgence, tangling supply chains and forcing factories to stop operations. China’s ‘Zero-Covid’ has negatively impacted businesses and made consumers uneasy. A Statistics Bureau statement noted that “Domestically, the impact of the epidemic is lingering,” noting shrinking demand and disrupted supplies.
Data of an economic slowdown in China comes after new challenges to the real estate sector, which by some estimates accounts for a quarter of gross domestic product. Reports indicate that a growing number of homebuyers are refusing to pay their mortgages over worries of their unfinished homes. In an unprecedented move, buyers of more than 230 properties in 86 cities joined together (July 2022) and collectively refused to make mortgage payments for unfinished, pre-sold units unless construction resumes, according to real-time updates on software development platform Github under the “WeNeedHome” project. A recent documentary which went online about how hundreds of homebuyers in the central Chinese city of Xi’an have had to live in unfinished apartments struck a chord with many Chinese homebuyers. Total mortgages at stalled Chinese housing sites amount to 2 trillion yuan (US$296 billion). The mortgage crisis comes near simultaneously with concerns over China’s financial and social stability following news of a cash crisis at rural banks in two provinces, especially at a sensitive moment ahead of a key Communist Party of China (CPC) meeting later this year.
Presale is the most common way of selling homes in China and has significantly increased developers’ leverage, and this creates the danger of a credit crunch, especially when disorderly de-leveraging takes place. As an increasing number of developers have failed to build and deliver pre-sold homes in a timely manner, the presales model is likely to result in a vicious cycle, while the increasingly infectious sub-variants of Omicron may exacerbate the downward spiral. It is anticipated that ahead of China’s 20th Party Congress where President Xi Jinping is expected to start his third term as party secretary, government will help to provide a solution to the home buyers crisis, before it escalates.
The primary cause of the current crisis is an issue of confidence among would-be buyers as they don’t trust that housing units will even be completed. Depending on the breadth and duration of the mortgage boycott, refusals to pay could devastate this important sector of the Chinese economy, as new home purchases account for more than 80 per cent of China’s property industry. This is compound an already dire situation as private developers fund new projects using 50 per cent of their income from home sales. There is a domino effect as 30 per cent of local government revenues come from land transfers. As volumes of home sales decline, developers purchase less land, which in turn could crush municipalities’ income. This translates into governments downsizing or reducing staff pay, thus leading to even weaker new home sales.
The current economic slowdown, brought on by repeated lockdowns under China’s zero-Covid strategy, has weighed on both homebuyers and real estate developers. Developers in China have been struggling since last year following regulatory crackdown as part of its de-leveraging efforts and moves to contain soaring property prices. Many have since experienced a liquidity crisis and missed payments on offshore high-yield US dollar bonds. Major lenders, including China Construction Bank, Agricultural Bank of China and Industrial Bank, said mortgages associated with unfinished, pre-sold homes from cash-strapped developers only make up a small proportion of their total homeowner loans and that overall risks are controllable.
State media quotes Premier Li Keqiang as saying the economy had been hit hard by unexpected factors in the second quarter, but that it had steadied and recovered in June. He also urged efforts to get the economy back on track as soon as possible, according to state media. Though, financial stress is likely to keep building up in the corporate and household sectors, a subprime mortgage crisis like the one seen in the United States in 2008/09 is seen as being unlikely, as the banks in China are mostly owned by the government, which has the financial resources to help them if necessary. Nomura estimates that Chinese developers have only delivered around 60 per cent of pre-sold homes between 2013 and 2020, with outstanding mortgage loans rising by 26.3 trillion yuan (US$3.9 trillion) during the same period. The combination of a housing crisis and a slowing economy could have an adverse impact on President Xi at the CPC Congress later in the year. How this situation is tackled and controlled will send signals to the people of China on the capacity and capability of Xi as a leader.