China’s real estate crisis is accelerating as developers across the country delay delivering houses to buyers. But the crisis’s exposure is linked to the banking system as many home buyers are refusing to pay their home mortgages.

As Bloomberg reported, Citigroup analysts released a research report on July 13. They revealed that buyers of 35 projects in 22 cities in China have stopped paying mortgages as of July 12. They cited the construction projects’ delays and falling prices in the property market.

Analysts warned the new move could add risks of bad debts to the banking system.

The buyers’ payment refusals show that China’s embattled property industry is weighing on the middle class. It then could pose a threat to the country’s social stability. 

According to Bloomberg, Chinese banks now have to face home-buyer defaults, in addition to liquidity stress among developers.

Citi’s analysts said that if a buyer defaults, the undelivered property will face problems, such as difficulties in finding buyers, and banks cannot recover funds from developers.

The analysts said “the forgoing of down payments may bring social instability.”

China’s real estate developers have suffered huge losses due to the zero-Covid lockdown earlier this year. The decline in housing sales has made it more difficult for builders who have already been short of funds. 

Some real estate projects have been delayed for months, and some completely shut down. 

And house prices are falling as a result. The Citi’s research shows that average selling prices of properties this year were 15% lower than purchase costs in the past three years.

The resulting non-performing loans caused by the mortgage payment refusal could reach 561 billion yuan ($83.3 billion). 

Citi analysts said that state-owned banks, including China Construction Bank, Postal Savings Bank of China and Industrial and Commercial Bank of China, could face more mortgage risks. They could suffer setbacks amid weakened investor sentiment.

Meanwhile, the renewed risks of Covid-19 restrictions continue to pose a threat to the real estate sector. 

Bloomberg pointed out its high-yield Chinese dollar bond index has fallen to its lowest point in a decade and has not risen in the last five weeks.

The Hong Kong Stock Exchange has removed six Chinese real estate companies from the Hang Seng Composite Index. They include Evergrande Group and Sunac China, which had been suspended for three months because they could not hand over their first quarter earnings reports.

The Financial Times citing data from consultancy firm Dealogic reported that about $13.3 billion in dollar bond payments from more than 60 property companies will come due before the end of this year.

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