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Chinese Homebuyers are Stiffing Banks on their Mortgages

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  • According to a Citigroup research report issued yesterday, buyers of 35 projects across 22 Chinese cities unilaterally stopped paying their mortgages as of July 12, citing project delays and an overall decline in real estate prices.
  • Some of China’s biggest property developers are struggling to pay the coupons on their bonds and many have gone into default.

In real estate-obsessed China, not paying down your mortgage is not only uncommon, but also a social taboo.

Yet across the Middle Kingdom, homebuyers are refusing to pay mortgages as embattled property developers drag their heels on construction projects, exacerbating China’s real estate crisis and increasing risks to the banking system.

According to a Citigroup research report issued yesterday, buyers of 35 projects across 22 Chinese cities unilaterally stopped paying their mortgages as of July 12, citing project delays and an overall decline in real estate prices.

For many Chinese, private ownership of property is a relatively new construct and became a reality only in the early 1980s when then-Chinese leader Deng Xiaoping instituted sweeping reforms that permitted private ownership of assets.

Since then, the seemingly constant rise in real estate prices has helped lift an entire generation out of poverty and even to this day, many Chinese see property as a means to improve their financial situation.

But a broad crackdown by Beijing to deleverage its heavily-geared real estate sector, has since sent the Chinese property market into a slump, with zero-Covid lockdowns sparking a decline in property prices for the first time in decades.

Some of China’s biggest property developers are struggling to pay the coupons on their bonds and many have gone into default.

Junk bonds of Chinese real estate developers are trading at their highest yields since the 2008 financial crisis and some are trading at distressed levels.

Citigroup’s research reveals that average selling prices of properties in the 35 projects were already selling on average 15% lower than purchase costs in the past three years, meaning that many homebuyers are underwater on their mortgages.

The contagion from China’s real estate market is also spreading to banks and other shadow lenders.

Non-performing loans triggered by the recent wave of homebuyers withholding payments on their mortgages could hit as high as US$83 billion, or around 1.4% of the national outstanding mortgage balance.

Nevertheless, Citigroup analyst believe that the recent wave of mortgage defaults are still manageable, even if China Construction Bank, Postal Savings Bank of China and Industrial and Commercial Bank of China, which have more exposure to mortgages, suffer setbacks amid dampened investor sentiment.

What ought to be worrying investors though is if some Chinese homebuyers withhold their mortgage payments with almost no consequence, it could embolden others to follow suit, potentially sparking a mortgage crisis.

The rate of default on Chinese mortgages is one of the lowest in the world as there is a cultural stigma attached to not paying off one’s debts in China, but as more real estate developers fail to complete their projects, more Chinese may be emboldened to go against cultural mores and that could spell bigger trouble for the Chinese economy at large.

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