China real estate crisis: Authorities to rescue property developers after homebuyers boycott mortgages

trading economics, peterson institute for international economics, evergrande group, china briefing — Image Source : PTI An economist likened China's real estate situation to a Ponzi scheme, a type of fraud that pays existing investors with funds collected from new investors.

Highlights

Authorities are promising as an initial rescue fund of $11.8B to offset crisis in real estate sector
Home buyers announced they would stop mortgage payments until work resumed on unfinished projects
Experts say the boycott is a byproduct of two decades of insufficient oversight

China real estate crisis: Chinese authorities are promising to establish an initial rescue fund of $11.8 billion (80 billion yuan) to offset a looming crisis in the real estate sector, where home buyers routinely purchase residences from developers' plans and begin making mortgage payments before the dwellings are finished, media reports said.

By having customers purchase homes "off plan," builders can receive construction financing and shift risks - such as costly pandemic-related supply chain delays and bankrupt builders - to the middle-class homebuyers, the VOA reported.

For many buyers, the risks seemed worth it. But then China's Covid-cooled economy strained many family budgets, and draconian lockdowns stalled work on residential projects. As home prices fell, some buyers found themselves paying mortgages on properties worth less than what they had agreed to pay. That was followed by the tightening policies in August 2020, when the central government realized real estate developers' debt was getting out of control, and draconian lockdowns stalled work on residential projects.

Amid all this, many home buyers announced they would stop making mortgage payments to banks until work resumed on unfinished projects, VOA reported.

Experts say the boycott is a byproduct of two decades of insufficient oversight over a red-hot real estate sector. One economist likened the situation to a Ponzi scheme, a type of fraud that pays existing investors with funds collected from new investors. An economist in China, who requested anonymity due to fear of reprisal said that real estate companies have never been regulated.

"When the economy is good, with the continuous expansion, most of the properties can be delivered. But when the economy is not good, it becomes a bit like a Ponzi scheme. If there is no follow-up funding, they will not able to complete construction," she said, VOA reported.