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Chinese real estate developers, including the highly indebted Evergrande, have built a business that relies on selling homes before they are finished. The picture here is of the Evergrande development in Beijing on January 6, 2022.

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BEIJING – China’s real estate market desperately needs a boost in confidence, analysts said, after reports of homebuyers suspending mortgage payments rocked banking stocks and raised concerns of a systemic crisis.

The size of mortgages is not as problematic as the impact of recent events on the demand and prices of one of China’s largest financial assets: housing.

“It is important for policymakers to restore confidence in the market as soon as possible and to dispel potentially negative responses,” Goldman Sachs China chief economist Hui Shan and team said in a report on Sunday.

Last week, an increase in the reported number of homebuyers who have defaulted on mortgage payments prompted many Chinese banks to announce their reductions in such loans. But bank stocks fell. Home buyers were protesting the delay in the construction of the houses they paid for before completion, just like in China.

“If left alone, many homebuyers could stop paying mortgages, [and] disrupt the flow of builders, which could lead to construction delays and project shutdowns,” Goldman said in the report.

The lack of confidence “reduces the desire of families to buy homes from these developers who want more sales,” the analysts said.

After two decades of massive growth, China’s real estate developers have found it difficult to remain submerged under Beijing’s criticism of companies’ excessive reliance on debt for growth. Heavily indebted developers such as Evergrande Group failed to make ends meet last year.

Developers’ ongoing financial problems as well as Covid restrictions have delayed construction projects, pushing home buyers to put their financial credit at risk by suspending their mortgage payments.

The number of construction projects involved more than tripled in the few days to 100 as of July 13, according to Jefferies.

That’s a tiny 1% of total household income in China, researchers said.

In all the banks covered by Goldman Sachs, the average exposure to properties involving theft was only 17%, the firm’s financial analysts wrote in a report last week.

“We see this mortgage risk as more of a family‘s willingness, rather than ability, to pay for a home,” the report said, “as developers have dragged out construction given the difficulty of financing.”

But when many homebuyers refuse to pay their mortgages, the sentiment of the poor reduces demand – and prices – in a vicious cycle.

This will encourage you to call more confidently.

“In the second quarter of 2022, there is no hope for a quick recovery of the real estate sector, and it will continue to drag down economic growth,” said Gary Ng, chief economist, Natixis CIB Asia Pacific. “It’s a remedy to increase the confidence of homebuyers and builders again, but it has proved to be a difficult task.”

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Suspending mortgage payments is an extreme measure that should not be a common practice, especially since there are legal procedures to address delays in housing completion, said Qin Gang, deputy director of the China real estate research institute ICR. To see also : Real Estate Market: Big Businesses Are Transforming Cincinnati.

He discussed the discussions with the industry leaders saying that the reports of payment freezes are not good enough to maintain the recovery of the real estate sector.

In general, if developers fail to deliver homes within the agreed time frame, home buyers can apply to terminate their purchase agreements, real estate analyst Goldman Sachs said in a report last week.

Analysts said approval usually takes three months and the developer will have to return the down payment and complete the mortgage payment to the home buyer, including interest. The rest of the mortgage must go to the bank, the statement said.

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A six-year low in house purchase plans

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A People’s Bank of China survey found in June that only 16.9% of residents plan to buy a home in the next three months, down from 16.3% in the third quarter of 2016.

At the beginning of this year, the central bank of the country took an important step in promoting the real estate market by lowering the mortgage rate. Many cities have relaxed laws in the past several months to support home buying.

But since April, property sales have fallen 25% or more from last year’s levels, according to Wind Information data.

The average price in 100 Chinese cities has not risen in the past year, although prices in major cities such as Beijing and Shanghai have risen by double-digits, reflecting differences in demand, according to Wind Information.

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Calls to complete and deliver apartments

Any policy that can guarantee the delivery of housing would be helpful, said Bruce Pang, chief economist and head of research, Greater China, JLL. This may interest you : Time to worry that Real Estate will crash like that in 2008?. He said the banks have limited opportunities for unfinished construction projects and are able to restore market confidence.

Dai Xianglong, the former head of the People’s Bank of China, said on Saturday that China will not experience anything like the 2007 US “subprime mortgage crisis,” and recommended measures to increase confidence in the real estate industry and stabilize housing prices. This is according to the official press release.

But even the government-backed Securities Times last week raised the specter of a financial crisis in a story that urged local governments and developers to deliver housing on time.

“Loan losses related to mortgage lending are relatively low and exposures are relatively small for most Chinese banks at present,” Harry Hu, managing director at S&P Global Ratings, said in a statement.

“But the pressure could build if the current moratorium on mortgage repayments by other groups of citizens in China is not handled properly and become dangerous,” Hu said.

The official newspaper of China’s banking and insurance regulator on Sunday issued a similar warning and urged support for the transfer of housing and real estate industry funds.

Without the drag on the infrastructure sector, China’s GDP would have grown by 3% in the second quarter compared to the 0.4% growth reported on Friday, according to Goldman Sachs’ analysis.

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