Chinese Homebuyers Refuse to Pay Mortgages in 22 Cities

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(Bloomberg) — Across China, homebuyers are refusing to pay mortgages as property developers drag on construction projects, escalating the country’s real estate crisis and risks of bad debt for banks.

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According to Griffin Chan, Citigroup Inc. analysts, buyers of 35 projects from 22 cities have decided not to pay mortgages beginning July 12, due to project delays as well as a fall in real estate prices.

The payment refusals underscore how the storm engulfing China’s property sector is now affecting the country’s middle class, posing a threat to social stability. Chinese banks, already struggling with liquidity stress from developers, now need to prepare for homebuyer defaults.

Now is “a critical time for social stability,” said Chan, adding that “the forgoing of down payments may bring social instability.”

A drop in home values hasn’t helped. Average selling prices of properties in nearby projects in 2022 were on average 15% lower than purchase costs in the past three years, according to Citigroup’s research.

The spread of the contagion has reached banks. Chan estimates that non-performing loans caused by wave of mortgage payment defaults could exceed 561 billion yuan ($83 Billion), or 1.4% of outstanding mortgage balance.

While the overall impact on banks will be “manageable,” state lenders including China Construction Bank Corp., Postal Savings Bank of China Co. and Industrial & Commercial Bank of China Ltd. may have more exposure to mortgages, and could suffer setbacks amid dampened investor sentiment, Chan wrote.

Postal Savings Bank’s shares fell 3.3% as of 2 p.m. in Shanghai, while ICBC declined 2%. The CSI 300 Banks Index dropped as high as 2.7%, its highest level since April 25.

According to the banking regulator, China’s non-performing loan ratio for mortgages was much lower than that of other forms. China Construction Bank reported that 0.2% of its residential mortgages were in bad condition as of December, while total loans had 1.42%.

This latest development comes as industry faces renewed threats from Covid restrictions. Wednesday’s third-day decline in a key real estate index saw it fall to its lowest level since March.

Read: How China’s property bond plunge is spreading

A Bloomberg index of China’s high-yield dollar bonds fell to the lowest in a decade as of Tuesday. Gemdale Corp. and Country Garden Holdings Co. also saw their domestic bonds fall to record lows.

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

Updates on bank shares at eighth paragraph

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©2022 Bloomberg L.P.

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