Beleaguered developers suffer another blow to their financial soundness as homebuyers stop paying mortgages
Businesses need to understand that current troubles in the real estate sector are not going to be resolved anytime soon. Considering this is a sector that accounts for nearly 30% of China’s economy, businesses need some serious long-term planning to accommodate the gradually changing landscape. Industry-wise, anything closely associated with or dependent on residential construction will probably slow in the next few years. Firms should actively explore other opportunities in areas such as infrastructure building, including commercial projects that are deemed critical to revive local growth. Consumption-wise, Chinese households’ spending will likely enter a protracted period of stagnated growth. A large proportion of the population, especially young people, will be saving more and spending less. Where they do spend, they will be more hesitant and pickier in order to get the most value for their money. Firms should find ways to enhance demand, such as through better marketing/promotions or new product introductions, and shift focus to lower-cost products, which tend to show more resilience when demand is depressed. Either way, the key is to offer consumers more value for the price.
When purchasing a pre-sale apartment in China, the usual practice is that buyers start to pay a monthly mortgage before the building is completed. The mortgage payments are supposed to be used to build the apartments; however, due to the ongoing debt crisis, many developers’ financial positions have been so precarious that they are unable to finish the buildings on time, even with the mortgage payments at hand. Homebuyers were not happy about developers missing deadlines and became even more frustrated after all options were exhausted, including talking to developers, mortgage banks, regulators, and local authorities.
As things stand, more than 300 building projects in over 100 cities across China have suffered from homebuyers halting mortgage payments. The “mortgage boycott” movement shocked the real estate sector and the banking system, prompting regulators to look into the situation and press local governments to quickly come up with rescue packages.
Zhengzhou, in Henan province, where around 20% of the unfinished projects are located, recently rolled out several policies to address the problem, including setting up housing funds to take over unfinished projects and providing special loans to developers.
Despite all the support policies introduced by many local governments across the country, the plight facing China’s real estate sector hasn’t gotten much better. This latest “mortgage boycott” movement further exposed the sector’s deep-rooted troubles and exacerbated many developers’ financial difficulties. A number of mortgage banks have tried to reassure the market by publicly stating that the scale of the halted mortgage payments was minimal and manageable, but it’s not just the banking system that is at stake here. More broadly, it dealt another blow to people’s faith in the real estate sector as a whole, likely to result in shrinking capital for the sector, both in developer land purchases and in consumer housing purchases. This will be detrimental to many developers that are already on the brink of failing to service their debts. Fearing social unrest, local governments are not really in a position to let developers go under. They have no choice but to step in and stabilize the situation however they can, despite already struggling with falling revenues and rising expenditures. Consumption will also remain weak as homebuyers lose confidence in the slowing property market.
At FrontierView, our mission is to help our clients grow and win in their most important markets. We are excited to share that FiscalNote, a leading technology provider of global policy and market intelligence has acquired FrontierView. We will continue to cover issues and topics driving growth in your business, while fully leveraging FiscalNote’s portfolio within the global risk, ESG, and geopolitical advisory product suite.
Subscribe to our weekly newsletter The Lens published by our Global Economics and Scenarios team which highlights high-impact developments and trends for business professionals. For full access to our offerings, start your free trial today and download our complimentary mobile app, available on iOS and Android.