Key Takeaways
- Chinese homebuyers' strikes on mortgage payments for delayed residential projects could contribute almost Chinese renminbi 1 trillion in banks' at-risk loans.
- Events could add to financial instability if not well managed.
- By withholding payments, mortgagors are effectively pressuring banks and governments to take action on developers that have delayed delivery of prepaid homes.
Mortgage strikes pose a limited direct threat to Chinese banks. Even in our downside scenario, potential at-risk mortgages would comprise just 1.3% of banks' total loan book. However, S&P Global Ratings believes the strikes point to weakening confidence among homebuyers that could dent the sales of stronger developers. This could prolong the recovery of the property sector.
If there is a sharp decline in home prices, this could threaten financial stability. The government views this as important enough to quickly roll out relief funds to address eroding confidence.
Homebuyers have withheld payments on mortgages spanning hundreds of residential projects in China, on the view some distressed developers don't have the means to complete the homes.
By stopping payments, China's mortgagors are effectively pressuring banks and the government to help push developers deliver the residences people paid for, we believe.
Our bottom-up analysis estimates that homebuyers' boycotts of mortgage payments could affect about Chinese renminbi (RMB) 980 billion of such loans, in our base-case. This accounts for 2.5% of China's mortgage loans, or 0.5% of total loans.
In our downside scenario, potential at-risk mortgage loans could widen to 6.4% of China's mortgage loan book, or RMB2.4 trillion. The large, state-owned lenders that are active in mortgages can handle such an increase in bad loans, in our view.
Our Bottom-Up Approach To Quantifying Potential Impact
Banks' announcements so far suggest they have been only minimally hit by the mortgage boycotts. However, we see a possibility that the effects could spread. Distressed developers not hit by boycotters may yet be targeted in the strikes. This would deter banks from providing mortgage loans to developments, effectively stopping sales in their tracks.
This, alongside tightened controls on the use of purchased funds for unfinished projects from homebuyers held in the escrow accounts, would raise the risk of defaults among developers and the firms that supply and support them.
In China, developers typically provide guarantees on homebuyers' bank mortgage loans for their unfinished projects. This practice gives us a good starting point to estimate outstanding mortgage loans for delayed projects under distressed developers.
We identified 32 distressed developers among the top 100 developers by their 2021 sales. The top 100 developers accounted for a significant portion of the sector's RMB18.2 trillion in sales in 2021. We derived a ratio of mortgage guarantees to sales based on the publicly disclosed contracted sales of these 32 distressed developers and their outstanding mortgage guarantees. Sales from the 32 distressed developers accounted for about 30% of the sales of the top 100 developers. We scaled the ratio up by one-third to account for sales by unidentified weak developers.
We applied the mortgage-to-sales ratio and the 40% sales by distressed developers ratio to the sector's 2021 sales. We then adjusted the result for projects sold by joint ventures to derive our estimated residential mortgage loans for unfinished projects by distressed developers.
Our analysis showed that at the end of 2021, about RMB4.9 trillion of residential mortgage loans were linked to unfinished projects by distressed developers. A portion of the RMB4.9 trillion would be related to delayed projects.
We used our Corporate Ratings team's estimated ratio of delayed projects to unfinished projects of 20% in our base-line scenario to estimate delayed projects by distressed developers. This is equivalent to RMB974 billion or 0.5% of the banking sector's outstanding loans. In our stressed scenario, we assume about half of the unfinished projects under distressed developers would be in limbo nationwide. We estimate this would encompass about RMB2.4 trillion in bank mortgages.
| Value Of At-Risk Mortgages In Our Two Scenarios | ||||||
|---|---|---|---|---|---|---|
| Base-line scenario | Downside scenario | |||||
| % of distressed developers' projects stalled | 20% | 50% | ||||
| Potential at-risk mortgage (Tril. RMB) | 0.974 | 2.44 | ||||
| % of total mortgage | 2.50% | 6.40% | ||||
| % of total loans | 0.50% | 1.30% | ||||
| Tril.--Trillion. RMB--Renminbi. NPL--Nonperforming loan. Source: People's Bank of China. S&P Global Ratings. | ||||||
Our table calculates the maximum nonperforming loans (NPLs) under our two scenarios. For the last piece of the puzzle--the percentage of people who bought delayed projects from distressed developers that may join the boycott--we look at an array of scenarios. Our chart shows the hit to banks' residential mortgage portfolio by escalating levels of payment boycott.
No Material Downside To BICRA
We do not see material downside to our BICRA economic risk score of '7', which is already on the weaker end of the scale. Our rated Chinese banks have quite favorable loan quality metrics compared with key peers at this level.
China's biggest banks provide most of the country's mortgages as they have the lowest funding costs, and they are better able to scale up this standardized product. They also have greater buffer for bad loans compared with some small regional banks, which tend to hold a higher relative exposure to property developer loans.
Court Rulings, Property Prices Affect Mortgagors' Willingness To Pay
To estimate how the mortgage strike might affect banks' NPLs, we consider two variables: the likelihood the courts will back homebuyers in their nonpayment, and the direction of property prices.
While China has a civil law system, mortgage borrowers may take cues from previous rulings. Court precedence suggests judges may favor homebuyers in their mortgage boycotts when the developers have failed to deliver as scheduled. For example, a Supreme People's Court Ruling in 2019 rejected a bank's request to collect the remaining balance and interest from homebuyers whose property was not delivered on time.
Falling residential prices would give homebuyers a big incentive to walk away from their purchases. National home prices are set to fall 6%-7% this year, in our view. It is not a coincidence that the most active mortgage boycotts have broken out in lower-tier cities that have seen the biggest drops in residential prices.
Typically, people who stop their mortgage payments suffer a hit to their personal credit score. They may not be able to subsequently travel by air or high-speed train, and may be restricted in their purchases of big-ticket items. This is a consideration. Furthermore, China lacks a personal bankruptcy law, which means their debts will never be forgiven.
So far the striking homebuyers are largely reacting to news about developer delays to projects, and have been emboldened by actions of others, we assume. However, without a clear court ruling, the borrowers are likely to reconsider the boycott when they realize the severity of the hit on their credit scores.
Reportedly, financial regulators are also considering guidelines to give payment holidays to buyers of homes that has no impact on their credit scores. We note that too much concession may create moral hazard issues, a key consideration for policymakers.
The policy response will be crucial to prevent further mortgage boycotts, which have the potential to pull down healthy developers. We now assume home sales will drop 28%-33% in 2022, almost double the size the drop we previously anticipated (see "China Property Sales Set To Drop By A Third As Mortgage Strikes Break Out," July 26, 2022).
Governments will continue to prioritize the completion of residential projects. To that end, authorities may enlist banks and asset managers to work with local governments to ensure projects remain funded till completion, in our view.
A few cities have set up relief funds to help restart stalled property projects and reassure mortgage borrowers. This includes one of the hardest-hit cities of Zhengzhou, which has established a relief fund with Henan Asset Management and developer Zhengzhou Real Estate Group, both backed by the Zhengzhou local government. Beijing is reportedly setting up a real estate fund, with China Construction Bank committing RMB50 billion and the central bank contributing a RMB30 billion relending facility.
This partially shifts the burden of undelivered homes to the banks, for the sake of social stability. This indeed seems to be the point of the strikes.
Writing: Jasper Moiseiwitsch
Related Research
- China Property Sales Set To Drop By A Third As Mortgage Strikes Break Out, July 26, 2022
- China's Village-Bank Fraud Could Hit Deposits At Smaller Institutions, July 14, 2022
- China's COVID Wave Could Add RMB1.1 Trillion In Forborne Bank Loans, June 1, 2022
- China's Banks Face A Doubling In Real Estate NPLs, Dec. 15, 2021
This report does not constitute a rating action.
| Primary Credit Analyst: | Yiran Zhong, Hong Kong 25333582; yiran.zhong@spglobal.com |
| Secondary Contacts: | Harry Hu, CFA, Hong Kong + 852 2533 3571; harry.hu@spglobal.com |
| Ryan Tsang, CFA, Hong Kong + 852 2533 3532; ryan.tsang@spglobal.com | |
| Ming Tan, CFA, Singapore + 65 6216 1095; ming.tan@spglobal.com | |
| Esther Liu, Hong Kong + 852 2533 3556; esther.liu@spglobal.com | |
| Research Assistant: | Ivy Yi, Hong Kong |
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