Revolt of Mortgage Borrowers

Ichiro Suzuki

In many Chinese cities, people are refusing to pay mortgages as it is becoming clear that real estate developers are not able to finish work on the house they already bought on borrowed money, it is reported. Their numbers are growing and the last count seems to be 90 projects in 30 cities. This was a problem already foreseen at the time of the China Evergrande debacle a little less than a year ago. At that time, the authorities pressed Evergrande hard to finish the projects under construction. While Evergrande was in no position to respond negatively to the order, whether they were capable of delivering it was entirely another question. Not surprisingly, and even worse, this problem was not confined to China Evergrande. Across the People’s Republic, there appears to be no shortage of overstretched developers and contractors that are struggling in the same financial catastrophe.


Ordeals of Chinese mortgage borrowers remind us of the suffering of borrowers in the U.S., in the subprime mortgage debacle that led to the 2007-09 global financial crisis. They both defaulted on their mortgages. There are, however, a distinct difference between the two cases. In the U.S., borrowers who defaulted were those of questionable credit quality whose credit applications would have been denied at different times other than years preceding the crisis. They got their house and moved into it, but returned the key as they found themselves unable to meet their obligations on higher interest rates. They were in a sense victims of greed of the lenders, though subprime loans were once considered as an innovative product. In contrast, Chinese mortgage borrowers who are refusing to meet their obligations are reportedly middle class people who are refusing to service their mortgages though they are capable of doing it. Why would anyone keep paying for a product that faces a strong chance of delivery failure?

American subprime mortgage borrowers simply made very poor financial decisions back then, even if many of them were tricked into borrowing by aggressive lenders and developers. Chinese borrowers in these cities probably made sounder decisions than American subprime borrowers, and they are still facing this nightmare. American subprime borrowers simply returned the key, moved out of the dream house and then declared bankrupt. That allowed them to start all over again. Not having made a significant down payment, their balance sheets were not really damaged. Banks suffered losses, instead. On the other hand, Chinese borrowers are still choosing not to service debt after having put down as much as 50% of the value of the house as a down payment. This conduct considerably hurt their household wealth, on top of grievous effects on their social credit score. This is a truly sorry situation for them.


Middle class people who are less unfortunate than these mortgage defaulters are still facing adverse effects of falling house prices on their household balance sheets. Bulk of the household wealth is tied to the houses they own. House prices are falling today contrary to their original expectations, that was up. House prices are not collapsing as the Communist Party is doing everything to keep them from precipitous falls. However, house prices, reportedly down 15% from a year ago, do not stop there. All the negative headlines on real estate since last summer definitely put potential buyers on high alert. They would not enter the market until they see bottoming of prices, and that seems to be some time away.


In a more market-oriented economy like the U.S., sharp falls would enable the market to find an equilibrium prices relatively quickly, usually within 24 months from the peak. Not so in China, where the autocratic rulers, obsessed with stability, do not tolerate sharp falls in prices. Since the last decade, the Communist Party made every effort to underpin real estate prices, with a dose of easy monetary and infrastructure spending, even if they knew such policies were already stretched too far. Then, this time around, President Xi Jinping’s adamant insistence on zero-COVID policy is inflicting damages to the real estate market through suppressed economic activities. He can’t stop the zero-COVID policy that made Chinese people feel so proud of their country on much, much smaller human tolls than in the West, notably the United States. On the other hand, holding onto this policy exacerbates the real estate market that has been in trouble for some time, and worse, making the middle class disgruntled.


For the first time since he rose to the helm, President Xi Jinping is finding that he can’t have everything. Loosening the zero COVID policy would not solve the problem in the real estate market though it would make the situation less worse. Of all these flashy slogans, the Chinese economy has not made a marked progress in restructuring. Heavy dependence on real estate, infrastructure investments and exports continue to persist though they were supposed to represent much smaller weights than they do today. The only thing that has changed in the 2020s is a sharp decline in private consumption overseas since Chinese people no longer travel, hence reducing pressure on the current account. Domestic consumption remains relatively weak, due not only to the pandemic but also, probably, to weakening of household balance sheets as a result of soft house prices. ‘Made in China 2025’ is heard much less often that it was several years ago.


About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.