Chinese homebuyers are running out of patience with the real estate slump.

Chinese real estate developers, including the heavily indebted Evergrande, have made a business of selling apartments before completion. Shown here is the Evergrande development in Beijing on Jan. 6, 2022.

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BEIJING – China’s real estate market needs a boost of confidence, analysts said, as reports of homebuyers defaulting on mortgage payments rocked bank stocks and raised fears of a systemic crisis.

Housing, one of the largest financial assets in China, is not a concern as the impact of recent events on demand and prices for mortgages.

“It is critical for policymakers to quickly restore confidence in the market and break negative feedback loops,” Goldman Sachs chief China economist Hui Shan and a team said in a report on Sunday.

A surge in homebuyers defaulting on mortgage payments last week prompted many Chinese banks to downgrade their exposure to such loans. But bank stocks fell. As is common in China, home buyers protested construction delays for apartments they paid for before completion.

“Left to its own devices, many homebuyers may end up defaulting on their mortgage. [further] This could increase the cash flow of property developers, which in turn could lead to further construction delays and stalling of projects, according to the Goldman report.

Uncertainty will “weaken households’ willingness to buy homes from developers who need the sales the most,” the analysts said.

After two decades of spectacular growth, Chinese property developers have found it difficult to continue relying on Beijing’s companies’ heavy debt for growth. Heavily indebted developers such as Evergrande Group defaulted late last year.

Developers’ ongoing financial woes with vivid foreclosures have delayed construction projects, leading homebuyers to put their own financial credit at risk by blocking loan payments.

Since July 13, the number of participating property projects has tripled to more than 100 in just a few days, Jeffries said.

That’s less than 1% of the total mortgage balance in China, analysts say.

Among banks covered by Goldman Sachs, exposure to assets, including loans, averaged just 17 percent, the firm’s financial services analysts wrote in a report last week.

“We see that this mortgage risk is more about the willingness of households than their ability to make mortgage payments,” the report said.

But if more homebuyers refuse to pay off their mortgages, the weak sentiment will reduce demand and, in theory, prices – in a vicious cycle.

It prompted calls to boost confidence.

“In the second half of 2022, there is no prospect of a quick recovery in the real estate sector, and it will continue to drag down economic growth,” said Gary Ng, Senior Economist, Natsis CIB Asia Pacific. “The remedy is to rebuild the confidence of homebuyers and developers, but that is proving to be a difficult task.”

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Stopping mortgage payments should not be a common practice, especially since there are legal procedures to deal with housing completion delays, said Qin Gang, deputy director of China Real Estate Research Institute ICR.

Citing discussions with industry officials, reports of deferred payments are not very conducive to sustaining the recovery of the real estate sector.

Typically, home buyers can apply to terminate their purchase contracts if developers fail to deliver apartments within the agreed time frame, Goldman Sachs real estate analysts said in a report last week.

Approval usually takes three months, analysts say, and the developer must return the down payment and completed mortgage payments, including interest, to the home buyer. The remaining mortgage payments should go to the banks, the report said.

Six year minimum home purchase plans

Demand for new homes is already down.

The People’s Bank of China’s quarterly survey in June showed that 16.9% of residents planned to buy a home in the next three months, down from 16.3% in the third quarter of 2016.

Earlier this year, the central bank took a significant step by reducing lending rates to boost the real estate market. Many cities have relaxed policies over the past several months to support home buying.

But since April, real estate sales have fallen 25 percent or more from last year’s level, Wind Data data shows.

Average prices in 100 Chinese cities rose little last year, although prices rose by double digits in big cities like Beijing and Shanghai, reflecting differences in demand, Wind Data reported.

Calls for completion and delivery of apartments

Any policy to ensure housing supply will be helpful, said Bruce Pang, Chief Economist and Head of Research, Greater China, JLL. He also said that since banks have limited exposure to unfinished construction projects, they can restore market confidence.

Dai Xianglong, former head of the People’s Bank of China, said on Saturday that China will not experience anything like the 2007 US “prime mortgage crisis” and suggested measures to boost confidence in the real estate industry and stabilize house prices. According to a state media report.

But even the government-backed Securities Times raised systemic financial concerns last week in an article urging local governments and developers to deliver homes on time.

“Loan losses related to mortgage lending are very small and the affected balances are relatively small at most of China’s national banks,” Harry Hu, senior director of S&P Global Ratings, said in a statement.

But he said the downward pressure could increase if the recent moratorium on mortgage payments by some resident groups in China is not handled well and manifests in systemic risks.

The official newspaper of China’s banking and insurance regulator published similar notices on Sunday and pushed for the delivery of apartments and funding for the real estate industry.

Without the drag on the property sector, China’s GDP could have grown by 3% in the second quarter, compared with the 0.4% growth reported on Friday, according to Goldman Sachs analysis.

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