In recent years, China's real estate market has continued to slump, causing banks to have to deal with a surge in foreclosed property auctions. According to official data, the number of foreclosed properties auctioned in 2023 increased by 43% year-on-year. As house prices fall further, homebuyers are unable to repay their loans frequently, and the crisis in the real estate market is transmitting to the banking system, raising concerns about financial stability.

The number of foreclosed houses has soared, and the pressure on banks has doubled.

Data shows that many Chinese banks have seen a trend of rising mortgage defaults in the first half of 2024. Properties in Qingdao and other places have faced disposal difficulties due to the surge in foreclosure auctions. The auction process begins even before the residents have moved out, resulting in buyers having to negotiate with the residents to vacate the property on their own, increasing the cost and time risk of buying a house. Although China's problems have not yet reached the severity of the US subprime mortgage crisis in 2008, the banking system has been under considerable pressure, and the balance sheets of some state-owned banks are facing increasingly severe shocks.

Chinese banks also have to face other losses related to the collapse of the real estate market. These include local government debt, defaults by real estate developers, and the continued increase in unfinished building projects. What's more serious is that many companies use real estate as collateral for loans, but as house prices fall, the value of these collaterals is far lower than the estimated value when the loans were issued.

The government has introduced support policies, and banks are worried about losing control

Since September 2023, the Chinese government has pushed banks to increase loans to real estate developers and borrowers in an effort to boost economic growth through credit expansion. Although state-owned banks are well-funded and have annual profits of nearly 4.3 trillion yuan, which can cover some losses on outstanding loans, large losses may put pressure on government fiscal revenue. Banks support the national fiscal budget by paying income tax, transaction tax and dividends. However, the decline in profits caused by the foreclosure wave and property price cuts may affect fiscal revenue and affect economic macro-control.

In China, the issue of foreclosed properties is particularly sensitive. The Chinese government's high level of control over social order means that banks are strictly controlled by regulators to avoid social dissatisfaction caused by forced relocation. To prevent public protests, regulators often put pressure on banks to limit the start of foreclosure procedures. In addition, the government's adoption of stronger homeowner protection laws has made it more difficult for banks to clean up properties, especially for cities such as Qingdao where the real estate market is experiencing a rapid decline.

The market impact of foreclosed homes, the price plunge is difficult to solve

In recent years, China's real estate market prices have fallen by about 30% from the 2021 high. There are at least 7 million unfinished apartments across the country, and many homeowners still need to repay their home loans. According to UBS's analysis, about 4 million of these unfinished projects were purchased by households, involving a total loan amount of about 2.5 trillion yuan, equivalent to nearly 7% of all mortgages.

It is worth noting that homeowners who repay their loans early are relatively less likely to face loan default pressure. Many homebuyers paid large down payments when housing prices were high, and even repaid part of their loans in advance. Although the current valuation of an apartment purchased by 32-year-old Qingdao resident Lin Chen (sound) has dropped from the original 1.4 million to about 1 million, his unpaid 600,000 loan means that the value of the property is still higher than the debt. Homebuyers like Mr. Lin are pinning their hopes on a recovery in the housing market.

The real estate bubble bursts and the next generation of young people face choices

Unlike the soaring housing prices in the early 2000s, the "post-80s" and "post-90s" generation of homebuyers face different economic difficulties. Taking Qingdao as an example, many small businesses' low-interest loans are used to repay home loans. Banks and regulators are deeply concerned about this practice because small businesses lack sufficient collateral to protect risks. In Qingdao, some home buyers, such as chemical salesman Wang Lei (sound), are facing property depreciation due to market adjustments. The apartment he bought for 2.1 million yuan in 2019 has now fallen to nearly 1.8 million yuan. He said that if he had chosen to rent a house, he might have been able to reduce his current financial burden.

Looking ahead: Banks are urgently facing a deeper crisis

Although the Chinese government has taken a series of measures to support the recovery of the real estate market, some cities are still facing long-term liquidation pressure. Qingdao Rural Commercial Bank has publicly reported a significant increase in its mortgage default rate. Industry insiders analyzed that the auction of foreclosed properties may continue to deteriorate in the future. Only about 0.5% of home loans in China have mortgage insurance, which makes banks lack insurance support when the foreclosure wave worsens further. The continued decline in housing prices in the future may lead to further pressure on the financial system.

Experts analyzed that although China's current financial system is relatively stable and has sufficient funds to absorb some losses, as the real estate market adjustment deepens, the role played by banks in maintaining stability will become increasingly important. The long-term adjustment of the real estate market may affect the transformation of the economic development model. In the future, China's banks and the government will jointly face the huge challenges of maintaining economic stability and defusing risks.