Amidst the ongoing real estate crisis in China, which has spanned four years, an increasing number of mortgages are falling underwater, putting both individuals and institutions under financial strain. As job losses rise and income growth slows, many are questioning the viability of continuing payments on properties with negative equity.
In Shanghai, a financial worker named Lucy Liu confronts imminent legal action from her bank due to missed mortgage payments. Once optimistic about rising property values, she paid 4.2 million yuan for her home three years ago but now witnesses its value plummet below her mortgage balance. With a substantial pay cut, Liu faces the grim prospect of potential losses if she continues payments or the risk of losing only her down payment if she defaults.
Liu’s predicament is not isolated, as proxy data suggests widespread struggles among homeowners in repaying their mortgages. Household debt in China has reached a record high, exceeding 145% of disposable income per capita. Banks are grappling with mounting bad loans and declining profits. Industrial & Commercial Bank of China Ltd. and Agricultural Bank of China Ltd. have reported significant increases in non-performing residential mortgage loans.
The residential mortgage delinquency ratio has surged to its highest level in four years, and foreclosed properties listed for auction reached a record in 2023. Banks have issued a record amount of financial instruments backed by non-performing mortgages.
Homeowners facing mortgage default are resorting to family funds and postponing life plans. Peter, a former fintech employee in Hangzhou, relies on his parents to cover his mortgage payments after losing his job. Carl, a former property consultant, sold two properties at a loss of one million yuan to pay off his mortgages, but still incurred additional debt.
China’s recent efforts to revive the property market by reducing downpayment requirements have drawn skepticism. Experts caution that lowering downpayment ratios may increase the risk of negative equity if demand fails to revive. New homeowners took out significant mortgages in 2023, reducing their buffer against potential price declines.
Despite falling property prices, some homeowners, like Chenchen, continue paying their mortgages to secure educational opportunities for their children. However, Joan, a Shanghai property agent, predicts her savings will deplete within two years, as she has been unable to sell any properties since April.
As the real estate crisis continues, homeowners face uncertainty and financial distress, while banks and financial institutions struggle with increasing bad loans and diminishing margins. The full extent of the crisis and its long-term impact on the Chinese economy and society remain to be seen.
