Why Are Chinese Mortgage Repayment Refusals Happening...Concerns Over Economic Slowdown and Negative Impact

Expansion of Mortgage Loan Repayment Refusal Crisis
'Real Estate' Shaken Amid Difficulties in Achieving 5.5% Growth

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Hyunjung] There are forecasts that the instability in the Chinese real estate market caused by the mortgage loan repayment refusal crisis could have a negative impact on the overall economy, including increasing the possibility of a local economic slowdown.

According to major foreign media on the 31st, as house prices have fallen due to the recent economic slowdown in China, homebuyers are refusing to pay before the completion of their homes (mortgage boycott), intensifying social unrest. Bloomberg reported that signs of the mortgage boycott have appeared since the end of last month, currently causing problems in 100 projects across 19 regions. According to the agency's own scenario, 1.8% to 6.5% of all mortgages in China are expected to be exposed to this crisis.

UK-based HSBC recently reviewed the main issues related to this matter in a Q&A format for investors. The first question was whether the current situation can be seen as the beginning of a Chinese-style mortgage crisis. HSBC's judgment is that it is "too much to see it that way."

Although there are some macroeconomic similarities with the US subprime crisis in the past, the structure and regulations of the Chinese housing market differ from those in the US. According to HSBC's analysis, China's mortgage loans are managed under strict standards, and the linkage with derivatives is low, making it unlikely that the risk will spread to the financial market.

In fact, the People's Bank of China and the China Banking and Insurance Regulatory Commission require a certain level of down payment when purchasing a home and verify the buyer's employment status and income. For buyers facing repayment difficulties, repayment conditions are partially adjusted to ensure continued repayment, keeping the default rate relatively low. As of the end of last year, only 6.2% of mortgage loans in China were issued as Residential Mortgage-Backed Securities (RMBS), which is significantly lower compared to 65% in the US.

The current mortgage repayment refusal crisis is also evaluated as being more due to the borrower's discretion rather than loss of repayment ability. According to HSBC, most of those refusing repayment are resisting the obligation to regularly repay loans even though their homes have not yet been completed. Construction projects where mortgage repayments have stopped are spread across 300 sites in about 100 cities, and the issue is analyzed to be more related to developers currently facing difficulties rather than falling housing prices or reduced household income.

The biggest concern for banks and policy authorities regarding this crisis is the potential weakening of future mortgage loan demand. Since mortgage loans account for about 20% of most banks' loan assets, a decline in demand could further shrink housing transactions, creating a vicious cycle.

If mortgage loans, considered major safe assets for banks, become non-performing due to repayment refusals, the banks' non-performing loan (NPL) ratio, which has been maintained at a low level, could also surge sharply.

An emergency bailout plan is being discussed as a solution. This includes providing funds to real estate developers facing financial difficulties to complete halted housing construction and guaranteeing deliveries from construction material suppliers.

HSBC also foresees the possibility of converting unsold incomplete construction projects into public rental housing construction and urban redevelopment to stabilize the housing market in the short term and promote housing supply in the long term. In the mid to long term, continuous reforms are suggested to address loopholes such as the practice of pre-selling homes, inadequate supervision of housing sales proceeds, and insufficient protection measures for homebuyers.

Kim Woojin, Senior Researcher at the International Finance Center, predicted, "If the instability in the Chinese real estate market deepens due to mortgage repayment refusals caused by the rising risk of default among real estate developers, it could accelerate China's economic slowdown and become an obstacle to social stability." He added, "With a 2.5% growth rate recorded in the first half of this year, making it difficult to achieve the 5.5% growth target, and ahead of the 20th Party Congress, the Chinese government faces the challenge of housing stability. The middle class, which holds an important position in the national economy, is leading the mortgage repayment refusal, so there is also a possibility that this movement could expand into social unrest."

This content was produced with the assistance of AI translation services.