First up, from Bloomberg via Yahoo Finance, July 31:
China’s banks face mortgage losses of $350 billion in a worst-case scenario as confidence plunges in the nation’s property market and authorities struggle to contain deepening turmoil.
A spiraling crisis of stalled projects has dented the confidence of hundreds of thousands of homebuyers, triggering a mortgage boycott across more than 90 cities and warnings of broader systemic risks. The big question now is not if, but how much it will batter the nation’s $56 trillion banking system.
In a worst-case scenario, S&P Global Ratings estimated that 2.4 trillion yuan ($356 billion), or 6.4% of mortgages, are at risk while Deutsche Bank AG is warning that at least 7% of home loans are in danger. So far, listed banks have reported just 2.1 billion yuan in delinquent mortgages as directly affected by the boycotts.
“Banks are caught in the middle,” said Zhiwu Chen, a professor of finance at the University of Hong Kong Business School. “If they don’t help the developers finish the projects, they would end up losing much more. If they do, that of course would make the government happy, but they add more to their exposure to delayed real estate projects.”....
....MUCH MORE, including some information-dense graphics.
And from the Paulson Institute’s Macro Polo think tank, August 1:
China’s Mortgage Fiasco: To Bail Out or Not To Bail Out?
China’s ongoing housing mortgage crisis will end up being much more significant than just the Evergrande default a year ago. This is largely because of the scale of the problem and the fact that the solution requires Beijing to spend considerable political capital rather than just financial capital.
Although Beijing’s “whack a mole” approach in saving the most distressed property developers will allow it to muddle through and avoid contagion in the banking system, it comes at the expense of eroding government credibility and undermining confidence in the “pre-sale” business model that constitutes more than 80% of all property developer revenue.
At risk are hundreds of billions of Chinese homebuyers’ money tied up in pre-sale accounts that they may not get back. That figure will likely grow as more property developers enter into default in coming months. Nearly half of all listed property developers now trade at a P/E ratio of less than 0.5, which is where Evergrande was at four months before its default. Moreover, nearly 100 cities, including major municipalities like Chongqing, are reportedly experiencing incomplete project problems.
The growing scale of stranded property projects means that the more than 300 mortgage boycotts, based on a rough social media tally, is likely just the tip of the iceberg. As more defaults ensue, these boycotts will grow in size accordingly.
On the face of it, the solution is obvious: bail out distressed developers because this is mainly a cash flow problem of not being able to pay construction firms to finish projects. Once construction restarts, the units get completed, buyers get their homes, and mortgage payments will start to flow again.
But what is obvious is not simple politically. In fact, Beijing has been quite timid in stepping in because it is concerned about a massive moral hazard problem that would shift all the cost onto the central government.....
....MUCH MORE
