Why the housing market is collapsing – and the risks to the wider economy.
China has been trimming interest rates recently – in contrast to other major economies – as it tries to stem the economic effects of its zero-COVID policy and address a growing property crisis. The country’s traditionally strong housing market has been affected by a funding crisis that has seen development paused and led to buyers refusing to pay their mortgages.
The recent spate of mortgage strikes by homebuyers across China has exposed the risk that has accumulated in the market as it has developed over the past two decades. The mortgage strikes started earlier this year among a group of people that bought homes in an Evergrande development in Jingdezhen city, Jiangxi province, but protests have since spread to buyers of other developments throughout China.
To date, more than 300 groups of homeowners are believed to be refusing to pay between US$150 billion (£127 billion) and US$370 billion in homeloans, according to informal surveys published online.
These protesters all have one thing in common: they have been paying mortgages, often at a rate of 5%-6%, on homes they have never lived in. These properties were sold before they were built under what’s called the presale system, which is a common way to buy property in China.
The trigger for the buyers’ strikes is a widespread belief among these protesters that the funds homeowners have paid in advance to the builders of these property developments have been misused.
Under the presale system, buyers deposit money in an account before the property is built. Chinese banks and local authorities are obligated to monitor developers’ use of these funds. Developers are not supposed to have access to all of the money until they have hit certain pre-agreed milestones during the building process.
But buyers have recently complained that many banks –- whether or not local authorities are aware is unclear –- have been providing loans to developers before the required stage of work has been reached.
