Disgruntled property buyers in China adopted that as one of their slogans at a protest in June. But they went beyond placards and chanting in their outrage over unfinished homes.
Many have already quit making mortgage payments, an extreme step in China, where dissent is rarely accepted.
According to a young couple who just relocated to Zhengzhou in central China, the developer withdrew from the project after receiving the down payment last year, which froze the project and their dreams.
A woman, who wished to remain anonymous, added, “I had dreamt many times, the thrill of living in a new home, but now it all feels ludicrous.”
Another female homeowner in her late-20s from Zhengzhou is prepared to quit making mortgage payments: “I will begin the repayment when the project resumes,” she added.
Contrary to the US subprime mortgage crisis of 2007, when banks provided money to high-risk borrowers who later failed to repay, many home buyers in China are capable of paying but choose not to.
A crowdsourced estimate on Github, where homeowners discuss their woes and choices, reveals that members have bought homes in about 320 projects in China. But no one knows how many stopped making mortgage payments.
S&P Global rating estimates indicate that the purposefully defaulted home loans might amount to $145 billion (£120 billion). But, according to some observers, it might be higher.
The uprising rattled the authorities, bringing attention to an already strained market in a faltering economy severely short on cash.
More concerningly, it has indicated a loss of faith in one of the cornerstones of the world’s second-largest economy.
In a recent paper, the think tank Oxford Economics stated that “mortgage boycotts, driven by deteriorating attitude about property are a grave danger to the financial condition of the sector.”
Why is China’s real estate crisis significant?
A third of China’s economic production comes from the real estate industry. It comprises businesses that manufacture white goods for apartments, rental and brokerage services, housing, and companies that provide building supplies.
However, China’s economy has been slowing down; in the most recent quarter, it expanded by just 0.4% over the same period in 2021. As a result, some economists predict that in 2021 will see no growth.
Beijing’s zero-COVID approach is primarily to blame for this; repeated lockdowns and ongoing restrictions have impacted incomes, which has thwarted savings and investments.
Because of the scale of China’s economy, a disruption in a critical area, like real estate, can impact the international financial system.
According to experts, the current concern is contagious as banks won’t lend if they think the industry is failing.
According to Ding Shuang, head of Standard Chartered’s Greater China Economic Research, “it will all depend on the policy.”
“This is government-inflicted, unlike other countries where property booms burst due to the markets.”
Thirty real estate firms have previously failed to make international debt payments. The most well-known victim was Evergrande, which missed payments on a $300 billion loan last year. If sales do not increase, other companies may follow, according to S&P.
As China experiences a demographic shift due to slower population growth and urbanization, demand for housing is also not increasing.
According to Julian Evans-Pritchard, a senior economist from Capital Economics specializing in China, “the basic issue is that we have reached a tipping point in the Chinese housing market.”
Where did it begin?
In China, real estate makes up over 70% of individual wealth, and property buyers frequently make upfront payments for unfinished construction.
According to Mr. Evans-Pritchard, these “pre-sales” account for 70% to 80% of all new home sales in China, and developers want that cash since they utilize it to fund numerous projects simultaneously.
However, many young and middle-class Chinese are no longer investing in real estate due to a failing economy, job losses, salary cuts, and, more recently, the worry that developers may not finish projects.
Developers depended on new revenue, and those recent sales are no longer occurring, which is part of the issue, according to Mr. Evans-Pritchard.
According to the financial organization ANZ, incomplete projects may account for loans totaling more than $220 billion. In addition, credit, a significant funding source during the boom years, has also dried up.
The “three red lines” are accounting standards China’s government implemented in 2020 to restrict how much developers might borrow. Banks’ readiness to lend to real estate companies has also declined due to the funding cutoff and the subsequent loss of market confidence.
What is the government doing?
One way Beijing is stabilizing the situation is by placing the responsibility on local governments; they are providing reduced down payments, tax breaks, cash subsidies to homebuyers, and relief funds to developers. However, the local economy will suffer due to a lack of land purchased by real estate developers. Therefore, this comes at a price.
The time, according to Mr. Ding, “is right for the central government and regulators to move in.” “It will eventually intervene to ring-fence some corporations’ issues. The industry is too crucial to the economy.”
According to recent reports from The Financial Times and Bloomberg, mortgage holders may be allowed a payment holiday without negatively affecting their credit score. Moreover, China recently provided $148 billion in loans to support real estate developers.
However, Oxford Economics recently stated that while any government intervention in real estate and infrastructure may boost growth in the short term, it is “not ideal for China’s longer-term growth.” It is because it “forces the government and the financial sector to support an unproductive (and failing) real estate industry.”
Additionally, this goes beyond a financial crisis. Mr. Ding warned that the boycott of mortgages could become a significant social problem.
And it could cause issues for President Xi Jinping as he starts his third term as the Country’s supreme leader.
What will follow?
Analysts believe the reported $148 billion bailout may not be sufficient. According to Capital Economics, businesses need $444 billion to finish the stalled projects.
Furthermore, it’s unclear whether banks, particularly smaller ones in rural areas, can afford the price tag of the mortgage strike.
Even if development picks back up, many developers might not make it because house sales might not boost confidence. The China Real Estate Information Corp (CRIC) estimates that the revenue of China’s top 100 developers fell by 39.7% in July 2022 compared to 2021.
The Chinese economy is at a crossroads, and this crisis is the clearest sign of impending trouble.
The government is making every effort to find new sources of growth. Still, it won’t be easy given how heavily the economy has relied on exports, infrastructure investment, and real estate over the past three decades, according to Mr. Evans-Pritchard.
“The period of very high expansion in China is gone now… and this is most evident in the housing industry,” he added.
What does it mean for the world?
Real estate developers all around China are in a desperate position and trying everything in their power to sell houses, even accepting down payments from farmers in the form of wheat, garlic, watermelons, and peaches.
A problem that began with the Evergrande Group is now threatening to engulf some of the largest developers in the nation, its lenders, and a middle class with substantial wealth invested in the real estate market.
According to Pantheon Macroeconomics, property accounts for around 70% of the nation’s household wealth, 30% to 40% of bank loan books, and 30% to 40% of local government revenue from land sales.
The National Bureau of Economic Research working paper estimated that from 2020, China’s real estate industry generated $4 trillion out of the $14 trillion in GDP, or 29% of the total.
Evergrande is a troubled organization. Many debt-ridden real estate companies, including Fantasia Holdings, Sinic Holdings Group, and Modern Land, have defaulted or are about to do so. Sunco, the third-largest developer in China, Sunac, has also seen a significant reduction in credit ratings as concerns about loan repayment mount.
Triple-red lines
The “three red lines” are a set of regulations that Chinese regulators adopted in August 2020 to regulate the highly leveraged sector better and restrict real estate companies’ borrowing. Developers are required to adhere to the following three red lines: A debt-to-asset ratio of 70% or below, enough cash on hand to cover short-term borrowing, debts, and liabilities, and a ceiling of 100% on net debt to equity.
Each red line decreased a company’s capacity to take on more debt. As a result, a company that crosses these lines can no longer take on debt.
To comply with the “three red lines,” companies were adopting various strategies to move loans and projects off the balance sheet or pass off debt as equity, according to a Reuters report.
China’s local government debt was $4 trillion as of 2020. According to Goldman Sachs Global impact, more than half the nation’s GDP, or $8 trillion, is thought to be held in “shadow” or “hidden” debt.
Because of China’s sinking real estate market, alarm bells are going out worldwide. However, it remains the global center for manufacturing, so if its economy deteriorates, exports from other nations will be slower and more expensive.
Due to supply bottlenecks caused by Covid, several industries like the auto, consumer electronics, and others have already seen a slowdown. China is a global leader in contract electronics and semiconductor production. In the event of an economic downturn, this would only increase.
China is also the developing world’s primary global creditor. So if China falls, developing nations depending on China for infrastructural projects would be hard hit.
The Belt and Road Initiative includes many projects the Xi government has funded. However, B&RI projects worth over $1 trillion in 139 different nations, including construction sites, roads, power plants, and other infrastructure projects, might also be left unfinished.
Despite the oppression of the Uighur community, zero-covid policies, and other human rights violations, the people supported the Chinese government because of the seemingly never-ending growth it catalyzed. It is also possible that a failing economy might create resentment against the government, forcing the CCP to take extreme measures to quell dissent or distract the public. The Tiananmen Square massacre was not so long ago, and fears of war in Taiwan are now palpable.