China is again facing a challenging real estate situation, with homeowners in different provinces refusing to pay mortgages on their undelivered, unfinished flats. This is happening only two months ahead of the Chinese communist party congress when comrade Xi Jinping is expected to confirm a third five-year term, following on the constitutional change of 2018 that scrapped presidential term limits.
No wonder then that the People's Central Bank has slashed its mortgage lending rate for the second time this year in an attempt to limit the fallout from a liquidity crisis in the property sector. The five-year loan prime rate was lowered to 4.3% from 4.45% on Monday, equaling a rate cut in May that was the largest on record.
The reduction in the benchmark loan prime rate will cut borrowing costs on new mortgages nationwide and boost the country’s debt-laden real estate sector, which accounts for almost a third of annual economic output. The LPR is based on the rates offered by domestic and foreign lenders to their best customers in mainland China, but is subject to various channels of influence from the People’s Bank of China. The real estate sector accounts for almost 30% of China's GDP.
In June the average prices of new homes declined by 0.5% year-on-year, following a 0.1% a month earlier, data website Trading Economics revealed. The problem is deep rooted. The non-payment would impact the country's banking industry as the non-performing assets will pile up further. The shadow banking sector, which includes trust companies and is an important funding source for Chinese developers, will be hurt as well, Peterson Institute for International Economics (PIIE) said in a blog.
Though Beijing has started firefighting to stabilize the situation by asking banks to ease lending for property developers, confidence among home buyers is at its lowest. The authorities are even looking at carving out a scheme facilitating a freeze of mortgage payment by homebuyers who have not been handed over the apartments.
The crumbling of real estate behemoths Evergrande Group last year and subsequently the fall of several other property giants have shaken up the market. Prices of new homes have been steadily falling for the last one year. While the demand for new homes, considered one of the safest investment options for the Chinese, have been surging until last year, developers continued to increase their debt levels.
The total debt level stood at about US$ 5.2 trillion as of June 2021, according to financial services company Nomura.
Protests by home buyers have become rampant. Earlier this month thousands of home buyers announced on social media they would not pay their mortgage loans. The protests have intensified spreading across 100 cities in the country. China Briefing said that the homes in question were acquired through a pre-pay model, in which buyers acquire apartments that are unfinished - or in some cases have not yet broken ground - when the initial deposits are paid and developers are required to hand over the homes within a stipulated time frame.
But amid overly ambitious development plans, sky-high debt, and a tightening regulatory environment aimed at deleveraging the industry, many have failed to do so. This has left some households making mortgage payments for several years before being able to move in, it said.