The number of foreclosed properties increased in the first half of 2023 amid China’s slumping housing market. Some experts believe that the highly leveraged real estate debt of local authorities and banks has been shifted onto ordinary Chinese people.
A number of institutions recently released their transaction data on foreclosed properties, or properties that are forced to be auctioned by a court, for the first half of 2023.
From January to June, 240,636 foreclosed properties were put up for auction nationwide, an increase of 19.79 percent year-on-year, of which 145,200 residential properties were put up for auction.
The number of residential foreclosed properties in China increased by 35.59 percent year-on-year. While the turnover increased by 16.22 percent year-on-year, the average transaction price fell by 2.43 percent.
Among 40 large and medium-sized cities in China, the top three cities with the highest number of pending auctions are Chengdu, Chongqing, and Nanning, with 5,132, 4,973, and 2,851 pending auctions respectively.
In terms of transactions, Shanghai, Hangzhou, and Ningbo have higher transaction rates that are over 80 percent. However, cities like Xining, Hohhot, Lanzhou, and Guiyang have failed auction rates of over 80 percent.
Although Chongqing’s real estate market is more active, the foreclosed property transaction rates of Chongqing and Chengdu (35.9 percent and 38.3 percent) are much lower than those of Shanghai (71.4 percent), Shenzhen (54.3 percent), and Beijing (52.7 percent), which indicates a significant lack of second-hand housing purchasing power in Chongqing and Chengdu.
Chen Kun (a pseudonym), vice president of China Construction Bank in Jinan city, Shandong Province, said that except for first-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen, the failed auction rates in other cities are high, and the key reason is that most ordinary people have no money.
Foreclosed Houses Increase Amid Economic Downturn
Defaulting on a home loan means that a buyer fails to pay the bank for the purchase of a property. In a depressed real estate market, some real estate companies fail to hand over properties on time, leading to buyers’ loan contracts defaulting and even abandoning the properties, which not only seriously affects the buyers’ life and social credit, but also triggers banks’ non-performing loans.“The maximum term of the loan contract signed by the buyer and the bank is 30 years. If the loan is 1 million [yuan, or about $139,500], the loan interest rate is calculated at 4.9 percent, the total repayment for 30 years will be over 1.9 million [yuan, about $265,100]. The buyer needs to pay the loan to the bank on time every month. If the payment is overdue, it is a default. If the loan is defaulted for more than six months, [the property] will be auctioned,” Mr. Chen said.
“In case of unfinished buildings, the money owed by the construction team to the bank cannot be repaid. Even if the homebuyers do not get the properties, they have to pay the mortgage on a monthly basis. Even if the homebuyers abandon the properties and mortgage them to the banks, they have to pay the rest of the house payment back, otherwise they will be treated as dishonest judgment debtors. Therefore, many people choose to defend their rights, but the parties involved blame each other, and the problems are difficult to solve.”
There are three main categories of people who stop making payments on their home loans: Speculators who purchase properties at high prices, upon seeing the fall in housing price, choose to abandon the properties to stop their loss; those who follow the trend and purchase properties, feeling pressure to repay the loan, choose to abandon the properties; and middle class families who are unable to repay the loan owing to income reduction or unemployment.
However, those who choose to stop making payments on their home loan may be blacklisted by financial institutions, implicating their families.
At the beginning of 2022, China’s big four state banks—the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, and China Construction Bank—sued 200,000 homeowners who had defaulted on their mortgages.
12 Large Banks Suffer From Non-performing Loans
The sharp rise in the number of defaults has also greatly increased the risk of non-performing loans.In 2022, in the composition of non-performing loans of 12 large banks, the proportion of non-performing loans in real estate was nearly over 20 percent, showing a significantly increasing trend. Among them, Bank of China boasted the highest non-performing loans rate, reaching 7.23 percent, followed by Industrial and Commercial Bank of China with 6.14 percent, and Agricultural Bank of China with 5.48 percent.
The non-performing loans of these three banks in real estate reached 56 billion yuan (about $7.828 billion), 44.5 billion yuan (about $6.221 billion), and 46 billion yuan (about $6.431 billion), respectively.
For the 12 large banks, their personal housing non-performing loan ratio is also rising. Among them, Agricultural Bank of China, Industrial and Commercial Bank of China, and China Construction Bank have the largest amount of personal housing non-performing loans, all of which are over 20 billion yuan (about $2.796 billion).
“China’s economy has clearly fallen into a severe recession. Every local authority in China is involved in real estate,” Xie Tian, a John M. Olin Palmetto professor in business at the University of South Carolina Aiken, told The Epoch Times on July 25.
“The debt of these authorities, the debt of financing platforms, and the highly leveraged debt of state-owned banks due to real estate are all problems caused by the CCP system, in which the white gloves of CCP elites and several real estate enterprise elites are profiting while all the people of the country are in debt.”
