Chinese real estate developers, such as Evergrande, are heavily indebted and have operated a business that relied upon selling apartments before they were finished. Here is a Evergrande development in Beijing from Jan. 6, 2022.
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BEIJING — China’s real estate market desperately needs a boost in confidence, analysts said, after reports of homebuyers halting mortgage payments rocked bank stocks and raised worries of a systemic crisis.
The magnitude of the mortgages are not as alarming as the effects of the most recent events on the demand and prices of one of China’s largest financial assets, residential real estate.
Hui Shan, chief China economist at Goldman Sachs, and a team stated in a Sunday report that “It is crucial for policymakers to restore faith in the market quickly”
A spike in the reported number of homeowners who stopped making mortgage payments last week prompted many Chinese banks and financial institutions to announce that they have reduced their exposure to such loans. The bank stocks dropped. Homebuyers were protesting delays in construction of the apartments they paid ahead of completion. This is a common practice in China.
“Leave it alone and more homebuyers could stop paying their mortgages,” [further] According to the Goldman report, this could put pressure on cash flows of property developers which could result in more construction delays and project halts.”
The analysts stated that insecurity “dampene households’ desire for homes from developers who arguably have the greatest need to sell them,” they said.
China’s property developer community has struggled to survive two decades of rapid growth. Beijing is cracking down on companies’ dependence on debt for growth. Late last year, Evergrande Group, an indebted developer went bankrupt.
Due to the persistent financial problems of developers and Covid restrictions, construction projects have been delayed. Homebuyers are forced to suspend their mortgage payments in order not to risk their financial credit.
Jefferies says that in just a few short days, the number of property projects increased more than threefold to more than 100.
The analysts stated that this represents 1% of China’s total mortgage debt.
The average exposure to mortgages in banks that Goldman Sachs covers was 17%, according to the financial services analysts of the firm.
“We consider this mortgage risk more about households’ willingness than their ability to make mortgage payments,” said the report. “As developers have dragged out construction of properties due to the difficulties of refinancing,” it added.
But if more homebuyers refuse to pay their mortgages, the poor sentiment would reduce demand — and theoretically prices — in a vicious cycle.
These calls have prompted confidence boosters.
Gary Ng, senior economist at Natixis CIB Asia Pacific, stated that there is no chance for a rapid rebound in the realty sector and that it will continue to hinder economic growth. It is possible to increase the confidence of developers and homebuyers, but this has been difficult.
According to Qin Gang (deputy director of China’s real estate research institute ICR), halting mortgage payments is an extreme measure and shouldn’t be a common practice.
He spoke out about conversations with industry executives, saying that reports of stopped payments were very detrimental to the recovery of the real estate sector.
Normally, if the developers fail to deliver apartments within a specified period, homebuyers have the right to cancel their purchase contracts. This was according to Goldman Sachs real property analysts.
Approval usually takes three months, according to analysts. Developers will have to return down payment and complete mortgage payments to the homeowner, including interest. The report stated that the banks should pay any outstanding mortgage payments.
Already, there is a decline in demand for new houses.
In June, a People’s Bank of China survey revealed that 16.9% of China’s residents planned to buy a house in the next three month. This is lower than the 16.3% reported in the third quarter 2016.
The central bank took an important step towards boosting the real-estate market earlier in the year by lowering the interest rate on mortgages. In recent months, many cities have eased their policies to encourage house purchases.
According to Wind Information data, real estate sales have dropped 25% or more since April compared to last year.
According to Wind Information the average Chinese city price has barely increased over the past year. However prices in major cities like Beijing or Shanghai have risen by double digits. This is a result of divergence in demand.
Bruce Pang, JLL’s chief economist and head, Greater China research, stated that any policy that could guarantee the delivery of homes is beneficial. He explained that banks are not subject to unfinished construction projects, and they have the ability to restore confidence in the market.
Dai Xianglong was the former head of People’s Bank of China. China would not experience something like the 2007 U.S. “subprime mortgage crisis,” Here are suggested measures to boost confidence and stabilize housing prices. This is according to a state media report.
But even state-backed Securities Times last week raised the specter of systemic financial risk In an article encouraging local governments and developers deliver homes on time.
“Credit losses relating to mortgage loans are minimal and the affected balances are small at most Chinese national banks currently,” Harry Hu, senior director at S&P Global Ratings, said in a statement.
Hu explained that there could be downside pressure if the latest suspension of mortgage repayments in China by some resident groups is not handled well.
Sunday’s edition of China’s official newspaper for the banking and insurance regulator published similar warnings. support delivery of apartments and financing for the real estate industry.
According to Goldman Sachs analysis, China’s GDP would have grown by 3% if it weren’t for the drag of the property sector. This compares with the 0.4% growth reported Friday.