China Property Crisis Is Spiraling With Homebuyers’ Boycott

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(Bloomberg) — Former UBS Group AG economist Jonathan Anderson once called it “the most important sector in the universe.”

Bloomberg: Most Read

Chinese property continues to attract global investors’ attention after more than a decade. But this time, it is for the wrong reasons.

Mounting signs of stress this week in an industry that accounts for about a quarter of the world’s second-largest economy have roiled China’s credit markets, dragged down the nation’s bank stocks and pummeled commodities from iron ore to copper.

After a burst of optimism earlier this year that looser regulatory curbs might stem the industry’s debt crisis, investors are getting spooked by rolling Covid lockdowns and a rapidly escalating homebuyer boycott of mortgage payments on stalled projects. The bigger worry is that a widespread loss of confidence in real estate will put major strain on China’s economy and financial system, which is sitting on 46 trillion yuan ($6.8 trillion) of outstanding mortgages and still has 13 trillion yuan of loans to the country’s beleaguered developers.

“Property has been getting steadily worse the whole time; prices, sales, starts, all terrible,” said Craig Botham, chief China economist at Pantheon Macroeconomics in London. “The chronic deterioration has now taken another step. It was always going to hit the financial sector eventually, given the prevalence of collateral in loan books with large real estate portions.”

What started as trouble with China Evergrande Group is now snowballing into a crisis that risks engulfing the majority of the country’s developers, its biggest lenders and a middle class that has significant wealth tied to the property market. China’s home prices have tumbled 10 months straight, according to data released on Friday.

“The whole pyramid is collapsing now,” said Anne Stevenson-Yang, co-founder of J Capital Research Ltd. “What’s different is that things are worse now because of the Evergrande crisis a year ago, which is spreading its tentacles throughout the Chinese economy.”

The turmoil this week has battered what was already one of the world’s most stressed industries. The average yield on Chinese junk-dollar debt, which is heavily dominated by developers has increased to almost 26%. Selling has also spread to investment-grade builders, with a bond issued by China Vanke Co., the nation’s second-largest builder by sales, falling to a record-low of 81.6 cents on the dollar on Tuesday.

China’s Covid Zero policy is exacerbating the situation by damping demand for property and depressing economic activity. China continues to enforce strict curbs on the virus, so lockdowns are still a common occurrence. Concerns have been raised about a recent outbreak in Shanghai, which has prompted fears that the city may be headed for another lockdown.

How China’s Property Developers Got Into Such a Mess: QuickTake

Fears that mortgage boycotts could lead to an increase in souring loans led to the lowest reading of Chinese bank shares since March 2020.

According to sources familiar with the matter, Chinese authorities met this week with banks to discuss the mortgage boycotts. They were concerned that other buyers might follow their lead. Two people who spoke on the condition of anonymity said that lenders have plans to tighten mortgage lending requirements in high risk areas.

The housing ministry in Xi’an became one of the first government agencies to address the issue publicly, saying it will penalize developers who cause social incidents due to failure of project delivery.

Homebuyers have stopped mortgage payments on at least 100 projects in more than 50 cities as of Wednesday, according to researcher China Real Estate Information Corp. That’s up from 58 projects on Tuesday and only 28 on Monday, according to Jefferies Financial Group Inc. analysts including Shujin Chen.

“If more home buyers cease payment, the spreading trend will not only threaten the health of the financial system but also create social issues amid the current economic downturn,” Betty Wang, a senior economist at Australia & New Zealand Banking Group Ltd., wrote in a note Thursday.

Banks rush to assure investors that the risks associated with loans to homebuyers are manageable. At least 10 banks have issued statements. The state-owned Agricultural Bank of China Ltd. stated it had 660 million yuan of unfinished loans, while its smaller rival Industrial Bank Co. claimed that 1.6 billion yuan of mortgages had been impacted. 384 million yuan of these have become arrears.

Nomura Holdings Inc. said the refusal to pay mortgages stems from the widespread practice in China of selling homes before they’re built. Confidence that projects will be completed has weakened as developers’ cash woes intensified.

Nomura economists led by Ting Lu estimate that Chinese developers have only delivered around 60% of homes they presold between 2013 and 2020, while in those years China’s mortgage loans rose by 26.3 trillion yuan. The boycott could impact mortgage sales by as high as 2 trillion yuan according to GF Securities Co.

China’s Credit Market Is Plunging Into a New Phase of Distress

Over the past 20 years, China’s housing market has become a rising risk. The government increased leverage in the real-estate industry. This helped drive up debt refinancing costs and caused a record number of defaults. The May decline in home sales was 41.7% compared to a year before, and investment fell 7.8%.

The real estate sector has a significant impact on the economy. Some estimates suggest that real estate is responsible for 25% to 25% of Chinese economic output when it includes related sectors like property services and construction. About 70% of household wealth is stored in property, along with 30-40% of bank loan books, while land sales account for 30-40% of local government revenues, according to Pantheon Macroeconomics’ Botham.

The worsening crisis will test authorities’ ability to minimize the fallout. China had established a stability fund earlier this year to support financially troubled firms in the face of growing economic risks. This will be a key task for President Xi Jinping as he prepares for a leadership summit widely expected to consolidate his rule for the rest of his life.

Data Friday will likely show the economy’s performance in the second quarter was the weakest since an historic contraction in the first three months of 2020 when the pandemic first hit. Economists believe that GDP grew 1.2% in Q2 compared to a year ago. This is compared to 4.8% for the first three months.

Construction slowdown is also affecting demand for building material. Iron ore fell below $100 per ton on Thursday, a drop of more than 8% since December. A year ago, iron ore was trading comfortably above $200 a ton, with China’s wave of Covid-era stimulus feeding a boom for property and the steel market. Shanghai saw the collapse of futures for steel rebar used in construction, their weakest point since 2020. Copper fell for the fifth day.

(Updates with comments and share prices throughout

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