On the Radar: China's property nightmare

Property prices in China just keep on falling, as the credit crisis squeezing the sector rolls on.

Data out this week shows prices dropped in July for the 11th month in a row, as the CCP and Chinese property companies continue to weather a brutal credit crunch, a growing mortgage boycott movement and a huge over-supply of housing, much of it only partly constructed.

China’s 70-city index of home prices dropped 0.1 percent compared with June, and 1.7 percent year on year, according to new figures from the National Bureau of Statistics

New house prices dropped in 40 Chinese cities and secondary-market prices fell in a further 51 cities compared with June.

Smaller and more provincial cities suffered more than the larger metro centres, where house prices actually inched up in some cases.

The price crash has now spread well into China’s so-called ‘lower-tier" cities, where many people have their savings tied up in housing projects that have stalled. Many Chinese families have cried “enough! ”, and have taken the extraordinary step of halting their mortgage payments.

The mortgage boycott action only began a few weeks ago, but has spread rapidly to around 100 cities, and now involves more that 300 housing projects, representing billions of dollars of investment that could be lost. The potential for the public action to spread further has seen authorities crack down on reporting the crisis domestically.

Mortgages on property make up around 20 percent of all debt in the Chinese banking system, and some analysts are warning China could see an increase of runs on smaller banks. Add to that the lingering issues around the fate of the giant property developer Evergrande, and it's easy to see how public confidence in the property market is at an all-time low.

For their part, the banks point out that the mortgage boycott currently involves just 0.1 percent of the total mortgage market.  

But concern over the situation is high and rising, as the CCP prepares itself for its 20th Annual Congress later in the year.

The CCP’s influential Politburo issued a statement assuring buyers that the government would help developers complete housing developments, and that local governments will be charged with getting the work done. .

Will that be enough? Unlikely.

A financial bailout for the entire Chinese property sector seems improbable given the billions involved, and the current weakening in the Chinese economy.

A major rescue plan may help the return of some confidence to the sector, but also risks encouraging desperate property developers to continue with the behaviour that caused the crisis in the first place, knowing the government and banks will be ready to pick up the tab.

But pressure from Beijing has been increasing on individual Chinese banks. China's banking regulator has also assured mortgage-holders that it would help ensure that projects are completed.

Many analysts believe the credit crunch at play in China could take years to fully rectify, although a catastrophic collapse of the property sector seems hard to predict, given the command-style Chinese economy which can “freeze” an economic problem like Evergrande in place, while solutions are found.

Evergrande has not collapsed, yet. And it may very well never collapse, as that will simply not be allowed to occur.    

The Evergrande property development strategy is the same money-go-round used by many smaller developers in China, in which the company collects cash from the pre-sale of an ever-growing number of apartments and adds to that the funds of those wishing to invest in property projects.

It then uses these funds to build new projects, and on it goes.

This system works as long as sales and construction of new homes continues to increase, but if the market is hit by something like a Covid lockdown, the accelerating construction gets ahead of the company’s ability to pay the bills.

Evergrande reportedly now has about 800 unfinished projects, with around 1.2 million people waiting for their home to be completed. Perhaps understandably, many of those people are among those now refusing to pay their mortgage.

In 2017 President Xi Jinping told the 19th Party Congress "Houses are built to be inhabited, not for speculation,"

As China’s command economy has moved to accommodate a capitalist property market over the last few years, that sentiment appears to have been somewhat lost in the rubble.

But we can assume Xi and the CCP leadership will be looking closely at the state-controlled financial levers available to not only fix the current credit issues, but also to beef up a flagging lack of public confidence in what has been until relatively recently a wild-west capitalist Chinese property sector.

 - Asia Media Centre