Reports of Mortgage Payment Issues in China: How Concerning is the Problem?

China’s mortgage suspension problem

The problem on reports of refusals to repay mortgages on delayed residential projects has been worsening, further hurting the already fragile property market and consumer sentiment. The number of stalled projects where local buyers collectively called for freezing mortgage payments amid suspended construction and delayed delivery has exceeded 200 in over 80 cities, according to local media reports.

Despite the authorities saying that the risks are controllable and bank assets are safe, China’s property and bank sectors have been under pressure as market concerns about the spreading trend of more home buyers ceasing payments, which may threaten the stability of the financial system.

So far, the affected unfinished projects are limited to several local property developers and mainly in lower tier cities where house prices have been falling sharply.

Mortgagers face opportunity costs if they refuse to repay loans in China under normal circumstances. If they were classified under the government’s list of “untrustworthy people”, they face various penalties in daily life, such as restricted access to bank loans, job applications, buying airline tickets as well as exclusion from social services. In addition, sales contracts are signed between property developers and home buyers while mortgage contracts are between banks and home buyers. The unilateral suspension of mortgage payments by homeowners could be illegal.

Nevertheless, authorities announced yesterday that it would allow homebuyers to temporarily halt mortgage payments on stalled property projects without incurring penalties.

Prompt policy intervention from the government is the key to prevent financial spillover risk

China’s mortgage suspension problem, if not addressed promptly, could be a trigger of a vicious loop of falling property demand, weaker property sales and declining house prices, which in turn leading to lackluster land sales and property investment. This not only would drag the re-opening recovery, but also cause hesitancy to lend in the key sectors of the banking system. 

The estimate size of mortgage loan that have payment suspension risk is RMB 740 billon (USD 110 billon), just around 2% of the country’s total outstanding mortgages. While the size does not appear a systemic threat to the financial system, preventing a negative spillover is very important, which would entail the central government’s timely response to reassure homebuyers and require banks’ support for property developers’ financing.

What are the solutions?

As maintaining financial and social stability are top priorities for Beijing, we expect policymakers to take rapid actions to avoid systemic risks to the banking system and/or the broader economy.

Chinese authorities have reiterated the importance of ensuring stability in the property market and meeting genuine demand for homebuyers, with the latter seen as the top priority by policymakers. In fact, the China Banking and Insurance Regulatory Commission has vowed to help local governments to deliver property projects on time. There were reports that government is weighing in and guiding banks to ease credit flows to property developers. According to local media, at least three major construction projects will restart.   

Further administrative measures are likely. For example:

• Getting local governments involved in surveillance by matching projects with state-owned counterparts; and
• Replenishing the capital of medium and small banks so that they can provide funding support to developers to prevent financial risks (special local government bonds are now allowed to support capital injections of small banks). 

Disclaimer