Is China stumbling into its own mortgage crisis?

It is spreading like wildfire. Homebuyers in China are refusing to pay the mortgage on properties they’ve bought but that their financially strapped developers can’t finish. Some say that they will only resume payments when construction restarts.
The protest involved more than 100 delayed projects as of July 13, up from 58 projects just one day earlier. The frustrated buyers accuse the developers of misusing sales proceeds and the banks of failing to safeguard their loans.
China has never seen anything like this. As in the US — until the 2007 subprime crisis — the possibility of troubles in the mortgage market was vanishingly small.
But this mortgage strike isn’t entirely unpredictable. Homebuyers have every reason to be angry. Most of the projects were begun by developers who have defaulted. China Evergrande Group led the pack, accounting for an estimated 35% of the total projects that faced mortgage revolts, data compiled by CLSA shows. One such project in eastern Jiangsu province was launched before the Covid-19 pandemic. Construction has been suspended since last August, while property values in its neighborhood has come down by about 10%.
In other words, not only did the affected households see their wealth dip, they can’t move in and enjoy their new apartments either. Over the years, with consent of local governments, the likes of Evergrande and Country Garden Holdings Co fed the residential housing boom through a so-called pre-sales model: Apartments are bought long before they are completed. Now the builders don’t have money to finish these projects.
Granted, developers’ debt woes were met with protests in the past, from suppliers, employees, all the way to hapless retail investors who had bought their wealth-management offerings. But this new development is something entirely different. It opens a Pandora’s box and poses direct threat to the stability of Chinese banks. The Ministry of Housing and Urban-Rural Development met with financial regulators and major banks this week to discuss the mortgage boycotts, Bloomberg News reported.
Unless President Xi Jinping’s government stops this stampede, a collapse of the banking system on the scale of Lehman Brothers Holdings in 2008 is very much in the cards. China is unprepared for such a big chunk of its bank loans to go sour. According to Autonomous Research, banks have about 62 trillion yuan ($9.2 trillion) of exposure to the property sector. More than half is in the form of mortgage loans. At China Construction Bank Corp, one of the world’s largest banks, mortgages account for more than 20% of its total assets.
Until now, China’s middle class were excellent customers, dutifully paying their monthly bills. The government’s social credit system — a national credit rating and borrowing blacklist — has worked well; bad credit can even hamper one’s ability to take high-speed rails. But what if some are just fed up and willing to walk away from their obligations? We’re not talking about one or two delinquent developers. In the past year, 28 of the top 100 developers have defaulted or asked their debtholders for extensions, data compiled by CLSA shows.

—Bloomberg