The Bursting of China's Real Estate Bubble

From ZeroHedge and Credit Bubble Bulletin:

Suddenly a rapidly increasing number of disgruntled Chinese homebuyers are refusing to pay mortgages for unfinished construction projects, exacerbating the country’s real estate woes and stoking fears that the crisis will spread to the wider financial system.

Consider that the Chinese real estate mortgage market is the largest asset class in the entire world at about $60 Trillion USD.  See comparisons below.

The World's Biggest Financial Bubble

The mortgage strike, which kicked off in late June in a stalled Evergrande development in Jingdezhen, has rapidly grown to at least 301 projects in about 91 cities. The protests have exacerbated the country’s real estate woes and threaten to derail attempts to revive the market amid an economic slowdown. According to some estimates, millions of mortgages are now involved.

On Monday, we reported that as the pressure on Beijing rises to take measures, authorities urged banks to boost lending to builders to help complete the projects, and are also considering giving homeowners a grace period on payments.

Homebuyers’ refusal to pay mortgages stems from the widespread practice in China of selling apartments before they’re built. 

Average selling prices of properties in nearby projects in 2022 were on average 15% lower than purchase costs in the past three years, Citigroup Inc. analysts said in a note on Wednesday. China’s home prices fell for a ninth month in May, with June figures set for release Friday.

Analysts believe that a drop in home values may be another driver for the refusal to meet mortgage payments. “Investors are concerned about the spread of mortgage payment snubs to buyers, simply due to lower property prices, and the impact on property sales,” Chen wrote. 

The Fallout

The Bloomberg China Real Estate Developers Index sank 10% this week. Number one developer Country Garden’s stock collapsed 27% (down 52% y-t-d). Vanke’s stock was down 18.9%, Longfor 20%, China Jinmao 13.7%, Agile Group 15.2%, China Overseas Land & Investment 10.8%, and China Resources 9.7%.

Yet stocks are a sideshow. Country Garden bond (3 1/8% 2025) yields surged 11.5 percentage points (11,543bps) this week to a record 41.02%, with a two-week gain of over 14 percentage points (14,085bps). Longfor bond yields this week surged 13 percentage points to 116%. This is a top-five Chinese developer whose bond yields began the year around 7%. Sunac, another top developer, saw its bond yields jump 600 bps this week to 112% (began the year at 22%). And let’s not forget #3: Evergrande yields rose another 358 bps this week to 141%. Basically, the market is saying they’re all either bust or heading in that direction.

One can easily tally a Trillion dollars of liabilities from a handful of these gargantuan developers caught in a bond collapse vise. Ramifications are enormous – likely momentous. It was ominous to see Chinese developers and banks at the top of the Asia CDS leaderboard this week. Lonfor CDS surged 225 bps. Vanke, China’s fourth-largest developer, saw its CDS trade above 500 bps this week for the first time (ended week at 502 bps). Vanke CDS traded at 250 bps in mid-June and was below 100 bps back in September.

The payment refusals underscore how the storm engulfing China’s property sector is now affecting hundreds of thousands of average citizens, posing a threat to social stability ahead of a Communist Party Congress later this year. Chinese banks already grappling with challenges from liquidity stress among developers now also have to brace for homebuyer defaults. A Bloomberg Intelligence index of Chinese developer stocks slid as much as 2.7%.