Chinese Homebuyers Across 22 Cities Refuse to Pay Mortgages

(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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Buyers of 35 projects across 22 cities have decided to stop paying mortgages as of July 12 due to project delays and a drop in real estate prices, Citigroup Inc. analysts led by Griffin Chan wrote in a research report distributed on Wednesday.

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 grappling with challenges from liquidity stress among developers now also have to brace 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 contagion is spreading to banks. Non-performing loans triggered by the wave of mortgage payment snubs could reach as much as 561 billion yuan ($83 billion), about 1.4% of the outstanding mortgage balance, according to Chan.

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 fell as much as 2.7%, the most since April 25.

For Chinese banks, the non-performing loan ratio of mortgages was well below the level of other forms of lending, according to the banking regulator. At China Construction Bank, only 0.2% of its residential mortgages were bad as of December, compared with 1.42% for total loans.

The latest development comes at a time when renewed risks of Covid restrictions also pose a threat to the industry. A key real estate index fell for a third day Wednesday, heading for the 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. Domestic bonds of large property developers, including Gemdale Corp. and Country Garden Holdings Co., also slumped to record lows.

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

(Updates with bank shares in eighth paragraph)