7/19/2022: Buyers Boycott Mortgages on Never Finished Homes in China
Nobody wants to give money to broke Chinese developers
A rapidly increasing number of disgruntled Chinese homebuyers are refusing to pay mortgages for unfinished homes. The Chinese government quickly censored crowd-sourced documents tallying the number of mortgage boycotts spreading across the country to stem the contagion. Fortunately, some of these documents are put on github and they are still available. As of now, more than 300 home development projects have received letter from buyers to request a “Mortgage Suspension” (停貸) until the developers make significant progress on the construction.
Apparently in China, it’s very common for home buyers to pay for a house before it’s built. When a home buyer signs the contract to buy a home that’s yet to be built, they would make a downpayment and get a mortgage from the bank. These funds would be placed into an escrow account. The developer could use the funds for construction and the buyer would start making mortgage payments to the bank. The developer is supposed to follow the timeline specified in the contract to deliver the home to the buyer on time. After going through a bunch of these notices on the github, I believe the home buyers’ demand is in general quite reasonable. In essence, developers have used up most of the escrowed funds while making little progress on the construction. In some cases, the project completion deadline is already past but the homes are far from being completed. Banks were supposed to make sure that developers are using the funds properly but buyers alleged otherwise since the houses are not built but the money is already gone . If I were a home buyer in such a situation, I would boycott the mortgage too.
According to this WSJ article, many Chinese real estate developers’ bonds are trading at distressed levels of less than $0.5 on the dollar. The big offender Evergrande’s June 2025 bond issue is currently trading at ~$0.09 on the dollar!!! Somehow after receiving so much mortgage money from the banks and borrowing even more from foreign investors, these developers have no money to finish up the homes.
In addition, macroeconomic head winds are blowing super hard on the real estate sector. China’s Q2 GDP only grew 0.4%, the slowest since the Wuhan lockdown. Because of the zero-covid policy, people are reluctant to invest in the future. The home sales have tumbled. New home sales from the top 100 developers were down 59.4% and 42.8% YoY this May and June respectively. Home prices are also dropping for the 10th consecutive month. If I were a potential home buyer in China, I would be scared to buy a new home right now. What if my city gets locked down again and I lose my income? What if the home prices keep going down? What if the developer takes the money but doesn’t finish the home? These concerns can also feed on one another to form a downward spiral.
Nomura estimates that Chinese developers have only delivered around 60% of homes they presold between 2013 and 2020. Developers need to figure out a solution to deliver the homes so buyers’ confidence can be restored. China is the second largest economy in the world and real estate is 25-30% of China’s economy. I can’t imagine what will happen if China’s real estate market collapses. There would be a lot of innocent lives ruined if the home buyers are asked to hold the bag of unfinished homes.