As property developers run out of funding to finish properties, a growing number of buyers in China have stopped making mortgage payments on incomplete homes. The boycotts are a sign of the distress in China’s property market as the government seeks to rebalance the sector.
While the amount of mortgages that have been boycotted — estimated at around 2% of outstanding mortgages — is probably only a small portion of the homes that are at risk of not being completed, it’s well within the Chinese government’s capacity to make sure there’s funding to finish them, says Yi Wang, head of the Asia Pacific Real Estate team in Goldman Sachs Research. She estimates it would cost the government about 600 billion RMB ($98 billion) to completely eliminate the “completion risk” for the next year.
That said, there are longer-term factors at work in the housing market, which has been an important source of economic expansion and investment for households. Urbanization and population growth, two key propellants for the property market, are slowing. Residential real estate is likely to undergo a multi-year downturn as the government pushes the sector to deleverage, according to Goldman Sachs Research.
We spoke with Wang about the mortgage boycotts and the megatrends that are driving China’s property market.
Why have some homebuyers in China boycotted their mortgage payments?
People have stopped paying mortgages out of fear that the developers are unable to complete the projects. Many of these projects have suspended construction for weeks or even months, and they’re realizing that the funding gap cannot be met anytime soon.
Typically, the buyers can terminate the pre-sale contract with developers if developers default on the completion date. Then buyers can terminate the contract and ask for the deposit down-payment back as well as all the mortgage payments that were already made.
But in this case, developers haven’t officially defaulted yet. In many cases they have just suspended construction. However, with homebuyers learning of these funding gaps, some may be worried that they may not be able to get 100% of their money back from developers if default occurs, and therefore are taking action earlier.
What percentage of mortgages are estimated to be in boycott?
We calculate that the associated boycotted mortgages are probably around 2% of the outstanding mortgage balances. But people are not saying that they are not willing to pay the mortgages forever. As long as the projects resume construction and there is assurance that the project will be properly completed, they say they will still pay the mortgages.
So I think it’s less about the mortgage risk at the moment. It’s more about the homebuyers’ confidence toward private developers’ projects, especially the ones that are really in trouble with debt payments.
How big is this issue, and how would you quantify it?
The reality is that what you are seeing today in terms of the number of projects that are in boycott is probably just a very small portion of the total number of projects that might have completion risk.
We estimate that at the end of last year, the total amount of properties that had been pre-sold since 2018 but not yet completed encompassed about 2.4 billion square meters: so 2.4 billion square-meters worth of projects are scheduled to be completed from this year to 2024, 2025. But if we just focus on what will be completed in the next 12 months, it’s about 800 to 900 million square meters in total.
Taking private developers’ approximate share of 60% of that, that gives you about 480 million to 540 million square meters. For the more than 300 projects that are really in boycott, that’s probably just 70 million square meters of that. That’s not to say that all of these 480 million to 540 million square-meters of projects cannot be completed by private developers, but the size is likely more significant than what we are seeing in the market.
That’s the reason we don’t think solving the current boycotts is enough. There’s a need for the government to take a more systematic approach to understand the liquidity situation of the funding gap in the private developer space, and to assess the funding needs for the next 12 months at least to contain the completion risk, in our view.
How difficult would it be for the government to contain this issue?
If developers officially default on the completion, then you can imagine how many families will be involved in chasing the money back from developers. Certainly developers won’t have sufficient funds to repay all the proceeds they got from buyers.
We have to think about the contingent impact if confidence collapses. That’s the worst case. Of course, the cost for the government to eliminate completion risk in the next 12 months in our calculation is not very big. It’s around 600 billion RMB. As long as this 600 billion RMB can be provided, the completion risk for next year will be largely eliminated according to our estimate.
If the government takes action more quickly, then the confidence can likely be restored. After all, the government has initiated a lot of policy stimulus since April, and demand is actually recovering since June from the very low level in April and May. The risk is that the recovery is impeded or disappears. In a more optimistic scenario, confidence is restored, helping drive a sustainable recovery, so eventually the credit system can get back to normal and private developers’ credit issues can resolved. But now it seems we are reversing back to the pre-June level if confidence is deteriorating again.
Are the megatrends within the Chinese property still intact or changing?
The key demographic drivers for the housing market are population growth and urbanization, which translate into urban housing formation. But these are slowing. The population is growing a lot slower than it was 10 years ago, and more than 64% of the population now lives in urban areas and so that urbanization trend is also slowing.
What is the GS Research view on China’s housing market?
It’s still the case that we expect a multiyear downturn. The government likely initiated this deleveraging process because they know that the current supply capacity is way above the long-term underlying demand level. Shrinking the supply capacity is needed to avoid more pain down the road.
