The COVID-19 pandemic has turned the lives of many upside down. From living lavish lives to working two jobs to stay financially afloat, this is the new reality for people across the globe. When the pandemic hit, people were forced to stay at home isolated, and had to put their goals and ambitions on hold. Some people delayed their weddings while others postponed their plans to travel abroad for education, some people canceled their plans to get a new car and some people put their dreams to own a house of their own on hold.

China saw a sudden rise in the number of people who were in the process of becoming homeowners, halting their mortgage payments on properties where construction had already been suspended. Now experts fear that this prolonged period of non-payment could damage the banks’ assets quality.

龔 月強/Pexels | China's banks are seemingly in hot waters

What is the Reason Behind the Mortgage Default?

However, authorities might jump in to get a handle on the mortgage defaults from increasing and spreading into other and larger cities but as long as the policymakers continue to overlook this situation and restore the homebuyer’s confidence, it could result in increased pressure on the developers. At the end of 2021, Household leverage was said to stand at 62% of GDP and 112% of household disposable income, which is an impressive statistic, but the recent rise in loans may have resulted in stretched balance sheets for many households. 

Miguel/Pexels | Despite the decline in household debt, this is not the biggest factor aiding the mortgage boycott.

This situation is a result of much serious and widespread distress in the construction and property industry which has led to the suspension of construction work at sites that were pre-sold housing projects. Mortgage payments start from the time of purchase when it comes to a pre-sold project and not when the construction is finished.

Small Cities, Big Projects

According to fitchratings.com, they don’t think that the defaults would direct cause a negative impact on the Fitch-rated Chinese banks but if the defaults continue to rise, it could lead to a serious and damaging economic and social impact on the country. The banks have disclosed that affected mortgage loans add up to less than 0.01% of their outstanding residential loans but it is those banks that are smaller or working at a regional scale that can be subjected to distress and can be considered to be vulnerable. This is because most of the homebuilders, who have already witnessed distress from the 2H21 have opted for projects in the lower-tier cities located in China’s inner region.

Zhanqun/Pexels | If the projects continue to be suspended, then these smaller and regional banks would be the most affected

For China, their best bet would be for the country’s policymaker to shift their attention to this as it can become a major economic issue if not dealt with properly. Experts suggest selective policy easing that would boost the property-market sentiment and give some space to the industry to recover.