Chinese banks face only a limited financial threat from homebuyers' recent refusal to pay mortgages on hundreds of unfinished projects, according to S&P Global Ratings.
The mortgages potentially at risk make up 1.3% of banks' total loans even in a worst-case scenario and will not threaten the banking system unless property prices fall sharply, Ratings analysts said during an Aug. 2 webinar.
"Falling residential prices would give homebuyers a big incentive to walk away from their purchase," said Yiran Zhong, director of financial institutions ratings. However, their personal credit scores will suffer and their debts will not be forgiven due to the lack of personal bankruptcy law, Zhong said.
Homebuyers in an under-construction project in Jingde city, in Jiangxi province, collectively decided in June to stop making mortgage payments, complaining that work had been suspended at the site. Soon after, buyers in more than 300 projects across 19 municipalities were reported to be taking part in a mortgage boycott.
Boycotts abating
The number of projects facing such boycotts has abated after peaking in mid-July. In a base case where 20% of unfinished projects by distressed developers face delays, Ratings estimates that buyers' refusal to make mortgage payments could affect 974 billion yuan of such loans. That makes up about 2.5% of China's mortgage loans, or 0.5% of total loans.
China's home prices may fall between 6% and 7% in 2022, Ratings analysts said. The government views falling home prices as important enough to quickly roll out relief funds to address eroding confidence, they added.
While the aggregate impact on banks' loan books will be manageable, Ming Tan, director and lead analyst for China financial institutions at Ratings, said regional banks, especially rural ones, may take the worst hit as local home prices fluctuate more than in top tier cities. Large, state-backed lenders such as Bank of China Ltd. and Industrial & Commercial Bank of China Ltd. can handle a possible increase in bad loans.
Still, the mortgage boycott, a rarity in China, points to weakening confidence among homebuyers that could dent the sales of stronger developers. That may prolong the recovery of the property sector, Ratings analysts said.
As of Aug. 1, US$1 was equivalent to 6.77 Chinese yuan.