Developers like Evergrande sold homes they haven’t yet delivered, and now some borrowers are refusing to pay.
It started as an act of protest by fed-up apartment buyers in a single project in a city in central China. Now tens of thousands of people around the country are withholding payments on their mortgages for homes that developers, including China Evergrande Group, have yet to finish.
The wildcat boycott on loans worth as much as 2 trillion yuan ($296 billion) threatens to deepen China’s real estate slump by shifting focus from the country’s embattled property companies to its massive banks. Lenders have relied on mortgages as their safest source of revenue as Covid lockdowns stifle growth.
Policymakers are on alert. Financial regulators have urged banks to boost lending to builders to help finish the projects, and officials are even considering giving homeowners a grace period on payments, according to people familiar with the matter. One bank after another has assured investors that risks are controllable and their exposure to the delayed projects is small, even as a gauge of lenders’ stocks declined. Shares and bonds of China’s property companies have been dragged down as well, including those of some big players which have long been considered sheltered from sector’s woes. “If this trend is left unchecked and snowballs further, there is a risk that it could lead to a worsening of credit profiles for Chinese banks and chill the recent uptick in real estate sales,” says Chang Wei Liang, a macro strategist at DBS Bank.
The protests are intensifying a crisis that Beijing appeared to have under control, in spite of the wave of defaults by Evergrande and other developers in recent months. The property market was beginning to stabilize, with sales jumping last month over those in May. The chairman of one of the biggest developers had said the market had bottomed out.
While the boycotts affect only a sliver of the lenders’ combined mortgage portfolios so far, the speed at which the protests have grown took many by surprise. They kicked off in late June with a social media blast signed by 900 buyers in a stalled Evergrande development in Jingdezhen, a city near Yellow Mountain that’s famous for its porcelain. They made a public plea to their local government and the company to resume construction within three months, or they would stop making payments. The movement has since spread to at least 301 projects in about 91 cities as of Sunday, according to figures from a crowdsourced document titled “WeNeedHome.”
That’s up from just 28 projects less than a week earlier, according to a note from Jefferies Financial Group Inc. analysts led by Shujin Chen. China Real Estate Information Corp. estimates that delayed projects in 24 major cities cover 24.7 million square meters (266 million square feet), equal to about 10% of properties sold last year. Although the initial social media post threatened to withhold cash in a few months, there are already reports from banks of missed payments. “The stakes here are high,” Nomura economists led by Ting Lu wrote in a note on Wednesday.
Tracking the extent of the protest has grown increasingly difficult after China began censoring in mid-July crowdsourced online documents tallying the number of boycotts. Such shared files have been a key source of data for global investors and researchers.
Gao Yang bought a 900,000-yuan condo in the central city of Nanchang from Sinic Holdings Group Co. in 2019. He’s been making mortgage payments for two years, but the condo unit still isn’t finished. Gao has taken three-hour train rides dozens of times from his current home in Hangzhou to appeal to the local government and the developer to get it done. Sensing little progress, he plans to join the boycott next month by withholding his 4,000-yuan monthly payment.
“That makes up about half of my income—it’s a huge pressure,” the 32-year-old designer says, adding that his salary has been reduced by a third amid the economic slowdown. “I can tighten purse strings as long as construction can be resumed one day.” Sinic and Evergrande didn’t immediately respond to requests for comment.
The boycotts reflect the unique risks of buying homes in China. While consumers in many countries need to put down deposits to secure a housing unit before it’s built, they generally don’t make mortgage payments until they take possession. In China, loan payments start with that initial deposit, and can go on for years when projects are delayed. That hoard of presale cash helped developers feed the housing boom in the past decade, allowing them to start new projects before old ones were finished. In essence, the builders were borrowing from the homebuyers themselves, except they owed them housing instead of cash.
The music began to stop last year with a government crackdown on borrowing by overleveraged firms, sparking at least 18 defaults on more than $26 billion of dollar bonds in recent months, including by Evergrande and such other big names as Sunac China Holdings Ltd. and Kaisa Group Holdings Ltd. The cash strain has made it harder for developers to complete projects, despite repeated pushes from Beijing to get the construction done.
Nomura’s Lu estimates that Chinese developers have delivered only about 60% of the homes they presold from 2013 to 2020. China Evergrande, which has seen protests over halted projects since last year, faces the most boycotts, according to the online tally. More than a dozen other builders are targeted.
Real estate accounts for about 78% of household wealth in China—double the US rate—and families typically save for years and borrow from friends and family to purchase a home. As the Evergrande debacle unfolded last year, many market watchers said that the financial contagion would be limited by the fact that homebuyers in China often pay in cash. But some did use mortgages, and the boycott underscores how much of the pain of the crisis has fallen on households.
China’s outstanding mortgages stood at 38.3 trillion yuan at the end of 2021, according to the People’s Bank of China. GF Securities Co. expects that up to 2 trillion yuan of mortgages could be impacted by the collective refusals. That’s the total balance of the loans; the amount that could be withheld will be smaller.
Other estimates of the impact are less dire. Should every buyer default, that would lead to a 388 billion-yuan increase in nonperforming loans, Jefferies’s Chen said. Banks say the impact is much lower still. Lenders have detailed about 2.11 billion yuan of loans at risk from the protests, according to a tally of banks that have disclosed their exposure.
The protest is all the more remarkable because Chinese families rarely abandon mortgages and banks are legally entitled to demand full repayment, according to Chang at DBS. Still, consumers may be hoping that collective action will force a resolution, especially as Beijing seeks to limit social unrest ahead of the Communist Party Congress in October. “This is a political protest,” Diana Choyleva, chief economist at Enodo Economics, said in an interview on Bloomberg Television. “It’s not going to be a banking crisis; they are not there. But it is a crisis potentially of confidence—and one that the Chinese Communist Party fears tremendously.”
Authorities face a dilemma, according to Chen at Jefferies. Easing lending rules to favor homebuyers may encourage additional delinquencies, but social stability remains the priority for the government. “Our base case is for the government to step in and untie the Gordian knot,” Chang at DBS said. —With Charlie Zhu and Emma Dong, and assistance from Rebecca Choong Wilkins
— With assistance by Adrian Leung, and Yasufumi Saito