Chinese homebuyers across 22 cities refuse to make mortgage payments

(Bloomberg) – Across China, homebuyers are refusing to make mortgage payments as property developers drag on construction projects, escalating the country’s property crisis and bad debt risk for banks.

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Buyers of 35 projects across 22 cities have decided to stop making mortgage payments as of July 12 due to project delays and falling property prices, Citigroup Inc. led by Griffin Chan wrote in a research report published Wednesday.

The payment refusal highlights how the storm that has engulfed China’s real estate sector is currently affecting the country’s middle class, posing a threat to social stability. Chinese banks, already grappling with challenges from liquidity stress among developers, are now also grappling with homebuyer defaults.

“Now is a critical time for social stability,” said Mr. Chan, adding that “abandoning low payments can bring social unrest.”

Falling home values ​​don’t help. According to research by Citigroup, the selling price of real estate in neighboring projects in 2022 is on average 15% lower than the purchase cost over the past three years.

The contagion is spreading to banks. According to Chan, bad loans caused by the wave of defying mortgage payments could amount to 561 billion yuan ($83 billion), about 1.4% of total mortgage outstanding.

While the overall impact on banks will be “manageable”, state-owned lenders include China Construction Bank, China Postal Savings Bank and Industrial and Commercial Bank of China. Ltd. Chan wrote.

Shares of Postal Savings Bank were down 3.3% as of 2 p.m. in Shanghai, while ICBC fell 2%. The CSI 300 Banks Index fell 2.7%, the highest level since April 25.

For Chinese banks, the bad debt ratio of mortgages is much lower than that of other forms of lending, according to the banking regulator. At China Construction Bank, just 0.2% of their residential mortgages were bad in December, compared with 1.42% for total loans.

The latest development comes at a time when the new risk of Covid restrictions is also a threat to the industry. A key real estate index fell on Wednesday, heading for its lowest level since March.

Read: How China’s real estate bond slump is spreading

The Bloomberg index of high-yield Chinese dollar bonds fell to a decade-low on Tuesday. Domestic bonds of major real estate developers, including Gemdale Corp. and Country Garden Holdings Co., also fell to record lows.

Explainer: How China’s property developers got themselves into such a mess: QuickTake

(Update bank stock in eighth paragraph)

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