Homebuyers Not Paying for Unfinished Homes, How Bad is China's Real Estate Market?

For more than a decade, the death of the Chinese real estate has been greatly exaggerated in the past. How about now?

ZH: "The Damage Could Be Huge": Chinese Banks Tumble, Swept Up In Mortgage Nonpayment Scandal As Borrowers Revolt

China Central Television said on its WeChat page that the regulator will guide financial institutions to participate in risk disposals based on market conditions, after researcher China Real Estate Information Corp. reported that home buyers had stopped mortgage payments on at least 100 projects in more than 50 cities as of Wednesday, spurring concerns that the quality of home loans is in rapid decline and could culminate in a 2007-like credit/housing bubble blow up.

Still, as Bloomberg Markets Live reporter Ye Xie writes, the grassroots movement of Chinese homebuyers boycotting mortgage payments isn’t exactly akin to the US subprime crisis of 2008. That said, no matter what Beijing does to address the latest chapter in China’s housing crisis drama, banks are likely to share the burden.

In the wake of a surging number of homebuyers who refuse to pay mortgages on construction projects that have stalled, China’s banking regulators said Thursday that they are coordinating with other agencies to support local governments in working to ensure the delivery of housing units. Separately, Bloomberg reported that policy makers held emergency meetings with banks to discuss the issue amid concern that it may worsen.

The boycotts raise the risk of mortgage defaults, a new set of troubles for banks that are already squeezed by exposure to ailing property developers. Mortgages make up almost 20% of total bank loans outstanding, amounting to about 39 trillion yuan ($5.8 trillion).

More at the link. It is serious enough that real estate professionals have started calling for a ban on pre-sales.

iFeng: 是否应当适时取消商品房预售制度，改为现房销售？

In the long run, the general abolition of the pre-sale system of commercial housing is the general trend. On the one hand, the pre-sale system naturally has many risks. For example, under the pre-sale system, once the capital chain of real estate development enterprises breaks, the project will not be carried out normally, resulting in a bad situation. The end of the building will damage the interests of the buyers; the buyers have paid all the house prices in advance by paying the down payment and bank mortgage loans, and assumed almost all the risks of the purchased houses in the future; the pre-sale system can ease the pressure on project development funds, extremely The development threshold has been greatly lowered, resulting in inefficient and disorderly competition in the industry; there are risks such as illegal sales and unfair transactions. Only by canceling the pre-sale system of commercial housing can we completely eliminate these risks, ensure the stable, healthy and long-term development of the real estate industry, and protect the interests of the people.

The pre-sale of commercial housing first appeared in Hong Kong and the pre-sale system of commercial housing in Hong Kong is called "sell off-the-plan". Due to the rapid population growth in Hong Kong at that time, there was a serious shortage of housing, and the Hong Kong government and developers had insufficient liquidity. On the one hand, this new sales method could raise construction funds for housing developers in a timely manner, and on the other hand It allows buyers to enjoy certain discounts on the purchase price, adapting to the capital situation and market needs at that time, making this model develop rapidly in Hong Kong and later spread to mainland China. In my country, the "Urban Real Estate Administration Law" in 1994 and the subsequent "Urban Real Estate Management Regulations", "Administrative Measures for the Advance Sale of Commercial Houses" and other legal documents clearly stipulated the pre-sale system of commercial houses. This new house sales method is widely used and has been It has become one of the core management systems for the operation of China's commercial housing market, and is the main mode of new housing transactions in my country.

There are a lot of back and forth arguments in the Chinese press, between those who say it helps homebuyers and those who want it banned because of the risk. My sense is it only makes homebuying affordable when there is a bubble, such that waiting 2 years for the finished home (or longer) results in a cost 20-50 percent higher. Yet, the pre-buy system fuels the bubble. Seems simple to me, probably also to the CCP.

iFeng: 防范延期交房，西安率先出手！沧州提出“购房款不进入监管账号合同无效”

On July 14, in order to effectively prevent the delayed delivery of commercial housing, five departments including Xi'an Housing and Urban-rural Development Bureau jointly issued 13 measures, including ensuring the compliance of land purchase funds, monitoring the whole process of project construction, and fully accounting for pre-sale funds. , strict payment standards, consolidate bank responsibilities, improve real estate credit management, etc.

In addition, Cangzhou, Hebei Province recently issued the "Cangzhou City Commercial Housing Pre-sale Fund Supervision Measures" (draft for comments), which clearly stated that all pre-sale funds of commercial housing should be deposited into the supervision account. After the supervision account is established, it must be noted in the commercial housing sales contract Ming: "The purchase price does not enter the supervision account, this contract is invalid, and the buyer and seller can cancel it at any time".

Industry insiders believe that the Xi'an policy is the first policy in the country aimed at delayed delivery of houses, which has released a very strong signal meaning. Its core content is to strengthen the supervision of pre-sale funds, and at the same time, strictly control the aggressive behavior of real estate companies from the land purchase process to prevent real estate companies from illegally acquiring land and creating risks; the establishment of a "one project, one file" system has a binding effect on the operation of real estate; The standardization and management of pre-sale work can help prevent illegal real estate from entering the real estate market, resulting in the transmission of risks to home buyers.

The Paper: 取消商品房预售制，该进入实操层面了

Recently, a number of property owners announced the suspension of loan repayment due to the delayed delivery of the property, which has attracted widespread attention. A number of banks issued announcements in response, saying that the scale and proportion of personal housing loans involved in risky real estate are relatively small, and the overall risk is controllable. The person in charge of the relevant department of the China Banking and Insurance Regulatory Commission said yesterday that they will guide financial institutions to participate in risk disposal in a market-oriented manner, and support local governments to actively promote the work of "guaranteeing the delivery of buildings, protecting people's livelihood, and maintaining stability".

With the intervention of many parties, I believe that the loan suspension crisis will be resolved in a benign direction.

The delivery of off-plan houses bought by home buyers has been delayed, or even completely unfinished, so that they must take the risk of sacrificing personal credit to protect their rights. This sympathetic experience has led many people to target the root cause of the unfinished business - the pre-sale system of commercial housing. For a time, the voice of "cancelling the pre-sale system of commercial housing" resurfaced.

The atmosphere is all set here, cancel the pre-sale system of commercial housing, is it time to enter the practical level?

Conclusion: China's real estate market has developed to where sale of only finished construction should be allowed.

Homebuyers refuse to pay mortgages on undelivered homes cannot be divorced from China's lockdown policy. Real estate in China is always a potential trigger for a crisis, but this pre-sale issue doesn't look like a crisis by itself. If the lockdowns trigger a crisis, it will emerge from somewhere else, or from a build-up of many smaller issues such as this one.