The real estate crisis is at the heart of China’s economic problems

For decades, buying property in China was considered a safe investment. Now, instead of laying the foundations of wealth for the country’s middle class, real estate has become a source of frustration and anger.

Hundreds of thousands of Chinese homeowners in more than 100 cities across China have banded together to refuse to pay off loans on unfinished properties. This is he one of the most widespread acts of public defiance in the country, where even small-scale protests have been suppressed.

The boycott is part of the fallout from China’s economic slowdown, which has been slowed by the coronavirus-related lockdowns, travel restrictions and shaken confidence in the government. The country’s economy is on its way to its slowest growth in decades. Its factories are selling less to the world and consumers are spending less at home. On Monday, the government announced that youth unemployment had hit a record high.

Exacerbating these financial setbacks are problems in a particularly vulnerable sector, real estate.

“Life is very difficult and we cannot afford to pay our monthly mortgage,” a homeowner in central China’s Hunan province wrote in a letter to local authorities in July. “We must desperately take risks and follow the path of the mortgage strike.”

The mortgage rebellion is roiling the real estate market as it faces the aftermath of a decades-old housing bubble. It has also created unwanted complications for President Xi Jinping, who is set to enter his third term as party leader later this year, with a message of social stability and China’s continued prosperity.

So far, the government has rushed to limit the attention garnered by the boycott. Government internet censorship began after the first mortgage strike notice went viral on social media. But the effects of the strike are already starting to spread.

According to a crowdsourced list titled “WeNeedHome” on GitHub, an online repository, the number of properties for which homeowner groups have initiated or threatened to boycott has reached 326 nationwide. We estimate that it could impact about $222 billion of mortgages on our balance sheet, or about 4% of outstanding mortgages.

The momentum behind the mortgage strike will add to the growing economic problems facing the Chinese Communist Party.

When a rural bank froze withdrawals in central China’s Henan province, a violent showdown began between depositors and security forces. A recent college graduate is having trouble finding a job, with youth unemployment hitting 20% ​​of him. Small businesses, the biggest providers of jobs, are fighting to survive under the constant threat of Covid-19 lockdowns.

On Tuesday, Chinese Premier Li Keqiang visited the southern technology hub of Shenzhen, urging a “growing sense of urgency” for an economic recovery. However, the real estate sector presents a unique set of challenges.

Real estate accounts for about one-third of China’s economic activity, and housing accounts for about 70% of household wealth, making it the most important investment for most Chinese. In 2020, China began cracking down on excessive borrowing by developers to address concerns about an overheated property market, where homeowners often buy apartments before construction.

The move has left many businesses who depended on easy access to debt to keep their construction projects on track. Evergrande and other large real estate developers defaulted as financial troubles deepened, with ripple effects across the industry.

Last month, hundreds of companies providing services and supplies to the real estate sector, including construction companies and landscapers, issued a joint statement to government officials saying they were “facing existential threats” after not receiving payments for months. ” he said.

Homeowners of a partially constructed apartment complex in the central Chinese city of Zhengzhou have compared themselves to the rickshaw boy, or the tragic character in Chinese literature, Camel Xiangzhi. His own rickshaw dream is thwarted by corruption and injustice.

“We, as thousands of Xiangzi, must let those who threw away those shackles, robbed us of their money, and wrecked their cars that Xiangzi is no longer a lamb to be slaughtered by others.” Homeowners wrote in a notice last month, local bank and government officials. If the developers don’t finish the building, “all owners will be forced to stop paying their loans at the end of August,” they wrote.

One of the homeowners who signed the notice was Andy Li.

Lee first purchased a $150,000 apartment in development in 2019. After making monthly mortgage payments for three years, he learned in February that the apartment would not be completed in May as promised. In fact, all construction had stopped. Developer Yufa Group has told the homeowner that he will have to delay the handover until December.

“We don’t even know what happened to the money. Why is there no money?” “If there really is no other way out, I will definitely stop paying the mortgage.”

Yufa Group was not immediately available for comment and did not respond to phone calls. The second listed number has disconnected. The local government of Zhengzhou announced that it will set up a relief fund to provide funding to developers in distress. Last month, China’s top authority, the Politburo, said local governments should ensure that unfinished buildings are completed.

But Michael Pettis, a professor of finance at Peking University, said the mortgage boycott was part of a larger problem. It is the bursting of China’s housing bubble that has been inflating for decades. Even if Chinese authorities have provided developers with ample capital, the underlying housing is still overvalued, he said.

“All the fictitious wealth created by skyrocketing real estate prices is unjustified,” Pettis said. “These solutions are only temporary solutions to keep things from getting worse in the short term. Ultimately, I don’t think they will succeed.”

For years, property developers didn’t have to worry too much about financing. Access to credit was easy, and about 90% of new homes were ‘pre-sold’. The buyer will hand over the deposit and make the mortgage payment before construction is complete.

This system gives developers the funds they need to maintain their buildings, and until recently, homeowners never complained.

Times have changed.

In the first half of 2022, sales for China’s 100 largest property developers fell by 50%, according to data from China Real Estate Information Corporation.

Lee, a 29-year-old hotelier, remembers a time when the market looked more promising. When he first bought the apartment, he provided his 30% down payment with money scraped from his parents’ retirement savings. He lives in Beijing, but thought the property in Zhengzhou, surrounded by parks and schools, would be a good first step in his plans to return to his hometown and start a family with his wife. rice field.

Those plans are currently on hold as construction of the Zhengzhou development is suspended. Lee and other homeowners intend to implement a boycott if the situation does not improve, he said.

China’s social credit system punishes violations such as failure to repay loans by restricting individuals’ ability to travel in the future, send their children to school, and borrow from banks.

But in a notice last month, homeowners said these risks did not outweigh the threat to their survival. It’s a shackle that can always be thrown in the trash,” they wrote.

Claire Who Contributed to research.