Chinese property developers, including debt-laden Evergrande, have run a company that relies on selling apartments before they are completed. Pictured is the development of the Evergrande in Beijing on January 6, 2022.
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BEIJING – China’s property market is in dire need of a confidence boost, analysts said, after reports of homebuyers halting mortgage payments rattled bank stocks and raised fears of a systemic crisis.
The volume of mortgages is not as worrisome as the effect of recent events on the demand and prices of one of China’s largest financial assets: residential housing.
“It is critical that policy makers quickly restore confidence in the market and break the potential negative feedback loop,” Goldman Sachs’ chief China economist Hui Shan and team said in a report on Sunday.
Last week, the surge in the numbers of homebuyers stopping mortgage payments prompted several Chinese banks to announce that their exposure to such loans was lower. But bank shares fell. Homebuyers were protesting the delay in building their apartments Paid before completion, as is usual in China.
Left alone, more homebuyers may stop paying their mortgages, [further] strains the cash flows of real estate developers, Which, in turn, may lead to further delays in construction work and halt to the project.”
Analysts said the uncertainty “is discouraging households from buying homes from those developers who arguably need sales most.”
After two decades of explosive growth, real estate developers in China are finding it difficult to stay afloat amid Beijing’s crackdown on corporate heavy reliance on debt for growth. Indebted developers like Evergrande Group I stumbled late last year.
Developers’ ongoing financial problems coupled with Covid restrictions have delayed construction projects, prompting homebuyers to jeopardize their financial credit by suspending their mortgage payments.
The number of real estate projects that were included more than tripled in a few days to more than 100 as of July 13, according to Jefferies.
Analysts said this represented 1% of China’s total mortgage balance.
Across banks covered by Goldman Sachs, the average exposure to property including mortgages was just 17%, the company’s financial services analysts wrote in a report last week.
“We view mortgage risk as more related to households’ desire, rather than their ability, to make mortgage payments, as developers have delayed property construction due to refinancing difficulties,” the report said.
But if more homebuyers refuse to pay their mortgages, the bad feeling will reduce demand – and in theory prices – in a vicious cycle.
This prompted calls to boost confidence.
“In the second half of 2022, there is no hope for a rapid recovery in the real estate sector, and it will continue to drag economic growth,” said Gary Ng, Chief Economist, Natixis CIB Asia Pacific. “The antidote is to boost the confidence of homebuyers and developers again, but it has proven to be a difficult task.”
Qin Gang, deputy director of the China Institute of Real Estate Research ICR, said stopping mortgage payments is an extreme measure that should not become common practice, especially since there are legal procedures to address delays in completing apartments.
He cited conversations with industry executives as saying that reports of suspended payments are not very conducive to sustaining the recovery of the real estate sector.
Typically, if developers fail to deliver apartments within the agreed period, homebuyers can apply to terminate their purchase contracts, Goldman Sachs real estate analysts said in a report last week.
Analysts said approval usually takes three months and the developer will need to return the down payment and completed mortgage payments to the home buyer, including interest. The remainder of the mortgage payments should go to the banks, the report said.
The demand for new homes has already fallen.
A quarterly survey conducted by the People’s Bank of China in June found that only 16.9% of residents plan to buy a home in the next three months, the lowest level since 16.3% in the third quarter of 2016.
Earlier this year, the central bank took an important step towards boosting the real estate market by lowering the mortgage rate. Many cities have eased their policies in the past several months to support home purchases.
But since April, property sales are down 25% or more from last year’s levels, according to Wind Information data.
The average price has barely risen in 100 Chinese cities over the past year, although prices in big cities like Beijing and Shanghai have risen by double digits, reflecting the difference in demand, according to Wind Information.
Any policy that could ensure home delivery would be beneficial, said Bruce Pang, chief economist and head of research, Greater China, JLL. He said that banks have limited exposure to unfinished construction projects and have the potential to restore market confidence.
Dai Xianglong, former president of the People’s Bank of China, said on Saturday that China will face nothing like the 2007 US “subprime mortgage crisis”, It suggested measures to enhance confidence in the real estate industry and stabilize housing prices. This is according to a government media report.
But even with the support of the state Last week, the Securities Times raised the specter of systemic financial risk In an article he encouraged local governments and developers to deliver homes on time.
“Credit losses related to mortgage loans are minimal, and the affected balances are small at most Chinese national banks currently,” Harry Hu, senior managing director at S&P Global Ratings, said in a statement.
“But the negative pressure could build up if the recent suspension of mortgage payments by some groups residing in China is not well managed and manifested in systemic risks,” Hu said.
On Sunday, the official newspaper of China’s Banking and Insurance Regulatory Authority published similar warnings and prompted Supporting the delivery of apartments and financing the real estate industry.
Without a dip in the real estate sector, China’s gross domestic product could have grown 3% in the second quarter versus 0.4% growth reported on Friday, according to Goldman Sachs analysis.
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