Why China’s Developers Are Facing a Mortgage Boycott.


China’s real estate crisis continues to worsen as some homeowners default on their mortgages as cash-strapped developers fail to complete their properties. The wildcat boycott had spread to more than 300 housing projects in nearly 90 cities at one point in mid-July, with up to 2 trillion yuan ($295 billion) in loans at risk. That has led officials to promise tighter control of pre-sales — a popular way to buy a house or apartment in China, where buyers must start paying off their loans even on projects still under construction. The protests are politically sensitive as the ruling Communist Party seeks stability ahead of a summit later this year expected to crown President Xi Jinping for a third term in office. They also keep buyers on the sidelines and pose a threat to the broader housing market.

1. How important is real estate to China’s economy?

More: Construction and property sales have been the biggest engines of economic growth since Xi came to office a decade ago. It has risen sixfold in the last 15 years – house prices have soared as a growing middle class flocks to property, one of the few safest investments. The development led to speculative buying as new homes were pre-sold by property developers who turned to international investors for funding. So while Chinese authorities have taken steps to reduce the risk of bubbles and dampen the equity that can create unaffordable housing, it has touched off a cash-flow crisis that has forced some major developers into default. The decline in sales that began during the outbreak was deepened by measures to contain Covid-19. So far, state intervention has averted a property market crash that could have weakened the financial system and crippled the global economy.

2. What drove the real estate boom?

In the year In 1998, when China created a nationwide housing market after decades of severely restricting private sales, only a third of its population lived in towns and cities. Now nearly two-thirds are, increasing the city’s population by 480 million. Struggling to keep up, the property sector has also expanded rapidly. Boom cities like Shenzhen have become less affordable than London or New York based on price-to-income ratios, frustrating a generation of potential buyers. Local and state officials, who rely on public land sales, have encouraged more growth, which has helped meet the central government’s high annual economic growth targets, which are often doubled. Debt piled up as builders rushed to meet demand. The annual dollar value of offshore bond sales — meaning those sold primarily to foreign investors — has risen from $675 million in 2009 to $64.7 billion in 2020, adding to the interest burden. Developers held $207 billion in dollar-denominated bonds as of the end of last year, accounting for a quarter of China’s total debt. In addition, unclear liabilities make it difficult to assess true credit risks.

3. What did the government do?

He has been trying for years to defuse the debt bomb amid fears that an explosion could trigger a massive financial collapse. In the year In mid-2020, he began squeezing new financing for real estate developers to reduce risk and asked banks to slow mortgage lending. The new borrowing parameters introduced for developers have proved to be a game changer. Called the “three red lines” by state media, they aim to reduce reckless lending by setting limits on constructive debt, debt and cash holdings. Annual loans are closed based on how many benchmarks are met.

4. What happened to the builders?

Those who did not have enough money to cover their debts found themselves in a dilemma. After the attack began, at least 18 were able to pay in offshore bonds. China Evergrande Group, once the country’s largest developer, was declared delinquent in December after missing payments on several bonds. The establishment of a “disaster management committee” led by provincial officials was quickly announced to prevent the organization from collapsing completely. (The holders are still wondering how much they will collect after the dust settles.) Others, including Kaisa Group Holdings Ltd. and Sunak China Holdings Ltd., followed. Fears of further contagion have been felt across the industry and the wider economy, dampening domestic growth, weakening consumer confidence and weakening global markets, which China’s real estate titans had hoped would be bailed out by the government.

5. Where does this leave the industry?

In a deep atmosphere. Combined sales by the top 100 developers have halved in the first four months of this year compared to last year. Property loan growth slowed to its weakest pace in more than two decades at the end of March. Construction is expected to fall 14 percent in 2021 from a year earlier, the steepest decline in six years. All of this is important because the real estate sector in China accounts for nearly a quarter of GDP, when non-residential construction, building materials and related activities such as real estate services are included.

Millions of square feet of unfinished apartments across China have been left to gather dust as developers struggle with cash flow – according to Nomura International HK. Ltd. economists estimated that Chinese developers had delivered only 60% of homes in mid-July. They were sold from 2013 to 2020. As the foreclosure resistance market is showing signs of stabilization, sales have been increasing in June. The chairman, one of the biggest developers, said the market had collapsed. A full interest rate crisis could leave millions more homebuyers who have already saved money. (Buyer protections commonly used abroad, such as escrow accounts and down payments, are becoming weaker.) Home prices began falling last September for the first time in six years. A fire sale will further shake up the market, squeezing out other developers and disrupting related industries and suppliers. The risk of civil unrest — more than 70% of China’s urban wealth is concentrated in housing — is high, much to the chagrin of the government. The historic sell-off in offshore bonds spreads from lower-rated property companies to stronger peers and banks to the larger domestic credit market. International investors sell more.

7. How serious is a mortgage objection?

Although the impact on lenders’ combined mortgage portfolios is small, the speed with which the protests have grown has surprised many. (Tracking the amount has become more difficult since China began censoring online crowdfunding in mid-July.) Financial regulators have urged banks to extend loans to builders to help finish projects, and payment grace periods have been announced for some homebuyers. Taking into consideration. In the year In a scenario analysis released on July 22, Bloomberg Intelligence estimated that between 1.8% and 6.5% of China’s total mortgages could be exposed.

To stabilize the situation, the government has revised some regulations. For example, the central bank has strengthened its support for struggling developers and banks have been ordered to ensure the growth of both housing loans and loans to developers in some areas. Above all, avoiding the “Lehman moment,” in which the 2008 U.S. bank failure sent shockwaves through global markets, is a priority at this year’s Communist Party Congress, where Xi is expected to win a third term. That political imperative probably means the government will try to manage the crisis, at least in the near future.

More stories like this can be found at bloomberg.com

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