Recent statistics from China’s central bank show that home buyers’ enthusiasm has fallen drastically. Despite price cuts and incentives, the world’s largest housing market continues to slump, and China’s banking sector is taking a hit on two fronts, as both defaults and prepayments rise. Meanwhile, China’s developers are starting to show the strain, with real estate giant Wanda Group making headlines this week as the value of its dollar bonds plunged.
In early 2023, the Chinese real estate market had a short-lived rebound as local governments across the country issued policies to bail out the failing real estate sector, according to the China Index Academy, a real estate research institute. By the end of April, the mortgage rate for first-home buyers in more than 40 cities had been lowered to below 4 percent.
CCP Puts the Brakes on Price Cuts
The weak housing market forced developers to cut prices. However, two real estate developers in Kunshan, China were penalized by Chinese regulators for cutting prices by a large margin, so much so, according to regulators, that they “disrupted the normal order of the real estate market and caused social instability.”Japan-based current affairs commentator Qu Kai told The Epoch Times on May 13: “The reason why the [Chinese] regime won’t let real estate developers lower prices is very simple. The chain reaction caused by price cuts will instantly burst the bubble of China’s property market, causing a series of economic crises that would be difficult for the CCP to manage.”
On the Brink
China is the world’s largest housing market. According to estimates from prominent economist Ren Zeping’s “China Housing Market Value Report 2021,” the country’s housing market value was $62.6 trillion in 2020, compared to $33.6 trillion in the United States, $10.8 trillion in Japan, and $31.5 trillion in the United Kingdom, France, and Germany combined. Ren is a former economist at China’s Development Research Center.According to Ren’s “China Wealth Report 2022,” the market value of China’s housing market reached 476 trillion yuan (about $73.8 trillion) in 2021. This represents a 17.9 percent increase in total market value compared to 2020.
When considering the ratio of housing market value to GDP, China’s housing market value in 2020 was already 414 percent, higher than Japan’s 391 percent before its housing bubble burst in the 1990s.
Risk Will Be Passed to Banks
“The consequences of real estate declines and residential mortgage defaults will eventually be passed on to the banks,” Fang Qi, a veteran Chinese finance professional living in the UK, explained to The Epoch Times on May 13.Fang said that for banks, there are two risk associated with residential mortgages. Both situations incur losses and directly weaken banks’ assets.
The first situation arises when homeowners default on mortgage payments. Among the reasons for rising defaults in China is an ongoing mortgage boycott, with many homeowners refusing to make payments on unfinished homes. An August 2022 New York Times article estimates that the boycott may affect as many as 4 percent of outstanding mortgages.
The second is when homeowners pay off their mortgages early, as many Chinese homeowners—saddled with higher rates—are doing. Mortgage holders are tapping their personal savings or taking out cheap loans under stimulus programs intended for big-ticket consumer purchases or for starting new businesses.
Analysts estimate that nearly $700 billion of mortgages—close to one-eighth China’s outstanding total—had been prepaid since early 2022 when banks started to lower borrowing rates.
Under normal conditions, this would free up cash for banks to finance other loans. However, given the current situation in which consumers are being very cautious about spending, it’s actually bad news for banks. Not only are they losing money on existing mortgages, there is a dearth of new loans to finance.
Real Estate Developers Feel the Strain
Amid China’s housing market downturn, many real estate developers are in turmoil. Chinese real estate giant KWG Property released an announcement (pdf) on April 28 saying it had failed to pay 212 million yuan ($31 million) of principal due on that date. The delinquency triggered another 31.2 billion yuan of debt (about $4.36 billion) becoming payable on demand. Two weeks later, the developer defaulted (pdf) on a $119 million redemption payment.Even Wanda Group, one of China’s oldest and largest real estate giants, is rumored to be at risk for a debt meltdown. Yields on two U.S. dollar bonds sold by its subsidiary Wanda Properties Global rose above 35 percent in April. Market analysts called the surge a sign that borrowers were having trouble raising new funds, exacerbating the risk of debt crisis and default.
Wanda Commercial made headlines with more troubling news on Tuesday as a $400 million dollar bond due for repayment in July fell to about 70 cents, “on the brink of distressed territory,” Bloomberg reported, under the headline “Real Estate Distress Deepens Again as China Woes Spread.”