Chinese home owners boycotting mortgage payments as economy sinks

When a rural bank froze withdrawals in Henan province in central China, it set off a violent showdown between depositors and security forces. Recent college graduates are struggling to find work, with youth unemployment at 20 per cent. Small businesses, the biggest provider of jobs, are fighting to survive under the constant threat of COVID-19 lockdowns.

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On Tuesday, Chinese Premier Li Keqiang visited the southern technology hub city of Shenzhen and urged a “heightened sense of urgency” for an economic recovery. But the property sector presents a unique set of challenges.

Real estate drives about one-third of China’s economic activity, by some estimates, and housing accounts for about 70 per cent of household wealth, making it the most important investment for most Chinese people. In 2020, to address concerns about an overheating property market in which home owners would often buy apartments before they were built, China started to crack down on excessive borrowing by developers.

The move created a cash crunch for many firms that had relied on easy access to debt to keep construction projects humming. As financial strain deepened, Evergrande and other large property developers spiralled into default, and the effect rippled across the industry.

Last month, hundreds of companies that provide services and supplies to the property sector, such as construction firms and landscapers, issued a joint statement to government authorities saying they were “facing a crisis of survival” because they had not been paid for months.

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Home owners of a partly built apartment complex in the central Chinese city of Zhengzhou compared themselves to Rickshaw Boy, or Camel Xiangzi, a tragic character in Chinese literature whose dream — a rickshaw of his own — is thwarted by corruption and dishonesty.

“We, as thousands of Xiangzis, must throw away those shackles, and let those who robbed us of money and smashed our cars know that Xiangzi is no longer the lamb who is slaughtered by others,” the home owners wrote in a notice last month to local banks and government officials. If the developers do not finish building, “all owners will forcibly stop repaying the loans” at the end of August, they wrote.

One of the home owners who signed the notice was Andy Li.

Li first purchased a $US150,000 apartment in the development in 2019. After making monthly mortgage payments for three years, he learned in February that the apartment would not be completed in May as promised. In fact, all construction had stopped. The Yufa Group, the developer, told the home owners that the handover had to be delayed until December.

“There has been all this fictitious wealth that has been created by surging real estate prices that is just not justified,”

Peking University finance professor Michael Pettis

“We don’t even know what happened to the money. How come there’s no money?” Li said. “We will definitely stop paying the mortgage if there are truly no other ways.”

The Yufa Group was not immediately available for comment, and a phone call went unanswered. A second listed number had been disconnected. The local government in Zhengzhou has said it would create a bailout fund to provide capital for struggling developers. Last month, the Politburo, China’s top ruling body, said local governments should make sure unfinished buildings are completed.

But Michael Pettis, a professor of finance at Peking University, said the mortgage boycotts are part of a bigger issue: the bursting of a Chinese housing bubble that has been inflated over decades. Even if Chinese authorities provide developers with enough capital, the underlying homes are still overvalued, he said.

“There has been all this fictitious wealth that has been created by surging real estate prices that is just not justified,” Pettis said. “Those solutions are simply temporary solutions to try to make things less bad in the short term. Ultimately, I don’t think they will succeed.”

For years, property developers never had to worry much about funding. Access to credit was easy, and about 90 per cent of new homes were “presold.” Buyers would hand over deposits and make mortgage payments before construction was complete.

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That system provided developers with the money they needed to keep building and, until recently, home owners did not complain, since the expectation was that property values in China would continue to rise, as they had for decades.

Times have changed.

In the first half of 2022, sales for China’s 100 biggest property developers fell 50 per cent, according to data from China Real Estate Information Corp.

This article originally appeared in The New York Times.

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