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China’s property crisis burns middle class stuck with huge loans

China’s property crisis burns middle class stuck with huge loans

China's struggling property developers saw shares rally following a cut in lending rates by the central bank. (File photo: AFP/Noel Celis)

China’s deepening property bust is sending shock waves through the nation’s 400-million-strong middle class, upending the belief that real estate is a surefire way to build wealth.

Now, as property developments stall across the country and house prices fall, many Chinese homeowners are slashing spending, postponing marriage and other life decisions, and, in a growing number of cases, withholding mortgage payments on unfinished homes.

Peter, for one, has given up on starting his own business and buying a BMW 5 series after construction on his 2 million yuan (US$300,000) home in Zhengzhou, the capital of Henan province, was halted by China Aoyuan Group. He is now saddled with a mortgage that’s eating up 90 per cent of his disposable income on a home he may never see.

“I know every investment comes with a risk and you pay the price for your own choices,” Peter said, asking not to have his full name or any personal details used for fear of reprisal. “But homeowners aren’t the ones to blame and shouldn’t bear the consequences.”

Peter is one of the hundreds of thousands of homebuyers in more than 90 cities across China to boycott a combined 2 trillion yuan in mortgages after firms such as Aoyuan and China Evergrande Group halted projects. A growing number of the nation’s middle class, which has an estimated 70 per cent of its collective wealth tied up in housing, are joining the wildcat actions to refuse payment, posing a threat to the economy and social stability. 

Chinese authorities are now rushing to defuse the situation, with some proposing a grace period on loan payments and for local governments and banks to step in and rescue the developments. 

Construction halts may affect 4.7 trillion yuan worth of homes in China, and up to 1.4 trillion yuan, or about 1.3 per cent of the nation’s gross domestic product, may be needed to complete them, Bloomberg Intelligence analyst Kristy Hung estimated.


China’s housing market is unique in the prevalence of new homes being sold before they are built, with mortgage payments starting immediately after the initial deposit. This presale cash helped fuel a housing boom by allowing developers to begin new projects.

While halted real estate projects are not unheard of in China, the depth of the current turmoil is unprecedented. It comes as the economy slows after more than two years of rolling COVID-19 lockdowns and a sweeping crackdown on the private sector in the name of “common prosperity” by President Xi Jinping has pushed youth unemployment to record highs.

Home prices have slid for 10 consecutive months, while disposable income per capita growth shrank for the fifth straight quarter at the end of June. It follows a debt boom over the past decade, which saw China’s household leverage rise to 61.6 per cent of its gross domestic product at the end of 2021 from 27.8 per cent at the end of 2011. Still, it’s relatively low compared with major economies like the United States and Japan.

Hong Hao, a former China strategist at Bocom International Holdings, said the mortgage refusals will suppress house prices and sales, creating a negative wealth effect that will ripple through the economy. 

“I don’t think it’s a good bet,” Hong said of the property market. “Many have gotten used to thinking home prices will never fall. But a paradigm shift is here.”

Andy Xie, a Shanghai-based independent economist, said the long property cycle had turned.

“The high and rising prices were justified on growth, that is, one day income will catch up,” Xie said. “That is no more.”

In China, where disposable income per capita is just a fraction of that in the US, it often takes years of savings to afford an apartment, which normally costs a few million yuan in main urban centers. Young couples typically rely on parents and grandparents to help finance purchases - the so-called “six wallets”. 

Li, a technology firm worker who has taken a 25 per cent pay cut this year, now uses a third of his salary to make a monthly 4,000 yuan mortgage payment on a stalled Evergrande development in Wuhan. This month, he joined about 5,000 others in a boycott to push the local government and the developer to restart construction on the project, which is supposed to house 39 residential skyscrapers. 

The 26-year-old says he’s “terrified” about his prospects and is afraid to start a relationship because he’s unsure he will own property - seen as a requirement for marriage.


Homebuyers are also looking at legal remedies, particularly against banks. Several preceding court rulings were in favour of buyers, nullifying their home purchase contracts and ordering the developers to return down payments and repay the remaining mortgages to banks instead.   

Guo, the buyer of an Evergrande project in Henan, has sued his bank after the project was halted last year and his lender failed to transfer the funds intended for construction into an escrow account.

“It’s the escrow bank and developer that violated the laws, why should home buyers pay the price?” he said.  

Peter’s bank also failed to transfer money into an escrow account that was supposed to backstop the project, giving the developer free rein to use the funds, he and other home buyers claimed in their mortgage boycott letter.

Evergrande and Aoyuan didn’t immediately respond to requests seeking comment.

Not all people are willing to protest or pressure local governments. Tom, who in 2021 bought into an Evergrande project in Jingdezhen, has no plans to stop mortgage payments or join protests for fear it could hurt his credit rating. He’s confident the local government will ensure the project’s completion. 

But many buyers, in particular the elderly, don’t have the luxury to wait. Liu, a retiree in Jingdezhen, couldn’t qualify for a bank loan and used his life savings of about 800,000 yuan on an apartment with an elevator. He has made two visits to the construction site and found no sign of activity.

“The best we can hope for is that the government can fix it,” said Liu, who lives on a pension of about 3,500 yuan a month. “But let’s be honest, even that seems like a forlorn hope.”

Source: Bloomberg/rc


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