IN SHANGHAI, a finance worker must clear her overdue mortgage or her bank will press charges. In Hangzhou, a couple have delayed having a baby and are relying on their parents to help pay their home loan, while another man is forced to sell two properties at a one million yuan (S$189,453) loss after his repayments spiralled.
As China’s property downturn grinds into a fourth year and house prices continue their downward march, an increasing number of mortgages are slipping underwater, placing fresh financial strain on both households and banks.
Now, with income growth slowing and job losses increasing, people are questioning whether it’s worth the struggle to pay a loan on a property that’s in negative equity.
The spectre of negative equity is also concerning banks. At least two lenders raised the issue at a recent meeting with China’s financial regulators, who pledged to look into it, sources familiar with the matter said, asking not to be identified as the discussions were private.
Lucy Liu’s bank is threatening court action after she missed four instalments on a three million yuan mortgage for her Shanghai home. It’s an abrupt change from three years ago when she bought the property for 4.2 million yuan with a belief that house prices would only go up. Since then, the value of the house has sunk below what she owes, she’s lost her high-paying job and she’s settled for one with 80 per cent less salary.
“I have lost hope,” said the 32-year-old financial worker, explaining she fears the price will continue to fall, leading to a bigger loss. “If I stop repaying I may only lose the down payment, but if I continue paying I may lose more.”
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While a lack of timely data on underwater mortgages and defaults makes it difficult to quantify the problem, proxy figures suggest Liu is not alone in struggling to pay her home loan. Household debt hit a new high of 145 per cent of disposable income per capita at end-2023, according to Bloomberg compiled data, considerably higher than 126 per cent in the UK and 97 per cent in the US.
The nation’s banks are already grappling with balance sheets eroded by rising bad loans and depressed margins. In March, Bank of Communications said its property bad loan ratio for money lent to developers jumped to almost 5 per cent at the end of last year from 2.8 per cent a year earlier, bigger rivals Industrial & Commercial Bank of China saw its bad loans from residential mortgages rise 9.6 per cent to 27.8 billion yuan, while Agricultural Bank of China reported a 4.7 per cent increase in soured residential mortgage loans last year.
And the list of disheartening data is growing: The residential mortgage delinquency ratio jumped to the highest in four years as at late 2023, according to Changjiang Securities chief economist Wu Ge; the number of foreclosed properties listed for legal auction hit a record in 2023, according to data from China Index Holdings; banks issued 24.7 billion yuan worth of financial instruments backed by non-performing mortgages in 2023, the most ever, according to cn-abs.com data compiled by Bloomberg.
‘People getting burned’
Some homeowners on the brink of defaulting on their mortgages have been forced to tap family savings and push back life plans. Peter, who lost his job at a fintech firm in Hangzhou last year, has to rely on his parents to repay his mortgage. His wife stayed employed but with a big pay cut.
“We planned to have a baby last year but gave up, we have no confidence to raise a child,” said the 32-year-old.
To be sure, banks can still recover at least part of the loans by putting the collateralized homes up for sale in case of defaults, and enforce on the borrowers’ other assets to recoup loan losses.
But the stakes are high for homeowners should they miss payments: they will be dragged into a lawsuit filed by their bank and have their home foreclosed and eventually sold at a 20 to 30 per cent discount. China does not yet have a nationwide personal bankruptcy law in place, so defaulters will be held accountable for their arrears in most cases and end up with a damaged credit record that may have a long-lasting impact on their future financing eligibility.
Some are trying to avoid those consequences, even if it means taking a big financial hit and learning a bitter lesson.
Carl, a former property consultant in Hangzhou, had to sell two of his homes at a total loss of one million yuan to repay his mortgages, one of which went underwater. After the sale, he still had to pay another 110,000 yuan on the property to clear the debt. At one point in 2022, he was sitting on a monthly mortgage bill of over 30,000 yuan, almost triple his wage, forcing him to use consumer loans to cover the debt.
“I still feel scared looking back,” said the 28-year-old, who also had to postpone buying a car for his family. “I didn’t expect such a severe consequence nor the harsh lesson – I’m a living example of people getting burned. It feels like my life journey was delayed a few years due to the property cycle.”
He still considered himself lucky as compared with his friends – one couple had to sell their home with a two million yuan loss to pay off their mortgage. That’s equivalent to about seven years worth of their savings. Some of his former colleagues are still struggling with monthly mortgage payment of around 80,000 yuan, far outstripping their income, he said.
‘Treading a tightrope’
China’s recent attempt to breath life into the property market by trimming downpayment requirements is also being questioned.
“Reducing the downpayment ratio is treading a tightrope,” said Raymond Yeung, Greater China chief economist at Australia & New Zealand Banking Group. “If the action fails to revive demand, lowering the downpayment ratio will increase the risk of falling into negative equity. New buyers taking 15 per cent downpayment mortgage will have less buffer against price fall.”
New homebuyers took out 528 billion yuan in mortgages last year on property worth 791 billion yuan or 150 per cent of outstanding loans, according to Yeung. That markup is the lowest among mortgage borrowers over the past 12 years and means a 33 per cent home price drop could push them into negative equity, Yeung estimated.
China’s new home prices have dropped 5.7 per cent as at April from the 2021 high, while existing home prices are down 11.4 per cent, according to Bloomberg calculations based on official data. Jefferies Financial Group expects property prices to drop at least another 30 per cent in major cities before stabilising, according to a note this week.
Some homeowners, though, are trying to stick it out – for now. Chenchen, who works at a private property firm in Shanghai, has no choice but to continue paying her mortgage so her child can enrol in the school nearby. The 38-year-old has not been paid for five months and her home value has fallen about 40 per cent to 4.5 million yuan.
Joan, a property agent in Shanghai, said her savings would only last two years at most if she keeps repaying her mortgage. She has not been able to sell any homes since April and does not see the property market picking up until 2027, meaning no stable income for the next two years.
“I will just have to play it by ear,” she said. “I have no other options anyway.” BLOOMBERG
