At risk are hundreds of billions of Chinese home buyers’ 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.
Beijing needs the equivalent of a “deposit insurance” guarantee on pre-sale units: a promise to buyers that they will get their units irrespective of what happens to the developer.
But such an open-ended commitment will come at exorbitant cost. Since 2020, about $5 trillion worth of residential property has been sold through the pre-sale model. If assuming just 10% of the projects require bailouts equal to half the value of the property, then the total bailout cost is $250 billion.
Houze Song MarketWatch 2 August 2022
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