China’s mortgage boycotts are symptomatic of a wider crisis

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The real threat to supporters is falling sales. Concern between investors and the regime

FILE PHOTO: Chinese president Xi Jinping is seen on a giant screen in Beijing.  Regime should take measures to prevent mortgage crisis from spreading to other sectors (Reuters)
FILE PHOTO: Chinese president Xi Jinping is seen on a giant screen in Beijing. Regime should take measures to prevent mortgage crisis from spreading to other sectors (Reuters)

german mathematician David Hilbert I once dreamed of a hotel with an infinite number of rooms. He stated that even if all rooms are occupied, the hotel can only accept a new guest by asking them to move to the next room. One of the guests would move into the room of a second guest, making room for the newcomer. The second guest would move into a third guest’s room, and so on. With an infinite number of rooms, the series would never end.

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Over the years, Chinese real estate developers have acted similarly. They sold the flats long before they were built . The money raised for these apartments was set aside to supposedly build them, just like every hotel room. Hilbert supposedly reserved for a guest. But the developers used the money for other purposes, like buying land. When it came time to pay for the construction, they sold more unbuilt apartments and used that money instead. . like a hotel Hilbert By placing every guest in the next room, Chinese real estate developers built each previously sold flat with the money from the next pre-sale. The series could go on as long as there were always new buyers.

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Unfortunately, Chinese developers are running out of rooms . Its 12-month sales through June were down 22% from the previous 12 months. . Pre-sales fell even faster. This painful brush that is finite many contractors have lacked sufficient cash to continue building the apartments their customers have already purchased . Chinese developers have revolutionized more than 6 billion square feet of real estate in the past three years. They completed less than half that amount. In the past, home buyers could not do anything about these delays. After all, they had already handed over their money.

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But even if they have paid their backers, they continue to pay their banks. In recent months, Angry buyers threatened to default on their mortgages if contractors didn’t continue to work on their apartments. . According to a document from crowdsourcing This mortgage strike, which circulated on the Internet, has spread to nearly 100 cities and more than 320 projects, including one. dragon city a peacock city and one Phoenix City . More than 40 of these projects Zhengzhou state capital Henan .

How far can boycotts go? There are some limits to its growth. Striking mortgage holders can get on credit blacklists and hurt their access to loans . And in China, he points out the rating agency S&PGlobalmost people can’t file for bankruptcy because “your debts will never be forgiven ”.

In a bleak scenario, 2.4 trillion yuan ($350 billion) worth of home loans could deteriorate. S&PGlobal. This is about 1.3% of total bank loans, enough to endanger some small lenders, but not enough to pose a systemic threat to the banking system.

The real significance of boycotts lies elsewhere . They show that Chinese households no longer believe that a previously purchased apartment will necessarily be delivered. This loss of faith is not limited to protesters. It also manifests itself in the weakening of pre-sales, especially for promoters in distress. Reluctance to buy new homes poses a greater threat to the Chinese economy than the refusal to pay off existing mortgages. . Weak sales will further reduce developers revenue, increase construction delays and deepen frustration .

How can this vicious circle be broken? Inside Henan , two state-owned companies (a developer and a “bad bank”) set up a relief fund to buy and run struggling projects. However, local governments Chinese lack of money to restore trust Andrew Batson research company Gavekal Dragonomics . He believes a credible plan will require central government intervention. It is understandably reluctant to inject more resources into a sector that currently represents such a large part of the economy. But new money invested in stalled projects can pay double dividends, help build unfinished apartments and restore pre-sale confidence.

In the long run, developers will need a less hectic business model. They will have to rely less on the early sale of apartments and starting the next project without finishing the last one. Housing demand in China is huge. But it’s not forever .

© 2022, The Economist Newspaper Limited. All rights reserved.

Source: Info Bae

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