What lessons do the ‘mortgage boycott’ in China hold for India?

If you buy a house with a mortgage, and refuse to repay loans after getting frustrated by the delays, it will affect your CIBIL score.

Look at what happened in the Amrapali case. Before the Supreme Court’s intervention, some home buyers had stopped paying EMIs. The majority who continued to pay did so out of fear that their credit score and future loan eligibility would be hit.

Prima facie, there are several parallels between the Indian and Chinese property markets. In both India and China, home buyers face project delays, defaults, abandoned projects, ghost cities, liberal lending, and last, but not the least, the developers’ uncanny ability to dodge the due process of law and get away with the buyers’ hard-earned money.

Hence, analysts are keeping a close watch on the unexpected developments in China where buyers are on a warpath with the builders.

What happened in China, and why?

Fed up with project delays and unfinished projects, thousands of Chinese home buyers who had paid for homes, announced in July that they would refuse to pay mortgages on homes that had not been delivered.

The boycott began in the Henan province and has since spread to Hunan, Hubei, Shaanxi, Hebei, and another 100-odd provinces. Total mortgages at stalled Chinese developments amount to 2 trillion yuan ($296 billion), according to analysts at GF Securities Co and Deutsche Bank AG.

The mortgage boycott comes a year after major Chinese property developers started defaulting on loans worth billions of dollars. The current situation is a culmination of decades of rapid property expansion, followed by the regulator’s efforts to deleverage the industry.

Doesn’t it sound like the Indian property market? In my opinion, there is hardly any difference.

Stressed loans in India

Any policy move to deleverage the real-estate sector and scrutinise liberal funding would lead to a similar kind of chaos in the Indian property market as well.

After all, the total value of stressed loans to the real-estate sector in India is roughly Rs 2.5 lakh crore.

Out of this, about 30 percent, or Rs 74,100 crore, is in the high-stress category and would be difficult to resolve. The remaining 70 percent, or Rs 1.73 lakh crore, is categorised as medium stress and is in the process of being recovered.

The bulk of the stressed loans, or approximately 63 percent, have been disbursed by Non-Banking Financing Companies (NBFCs) and Housing Finance Corporations (HFCs). The remaining 37 percent is owed to banks.

What is even more disturbing is the fact that Rs 90,000 crore are stuck in cases that are undergoing corporate insolvency resolution process (CIRP). There are close to 300 real-estate cases that have been admitted to the NCLT (National Company Law Tribunal) and are awaiting resolution.

The number of project-related cases waiting to be taken up by the NCLT is believed to be significantly higher, possibly close to 1,000. The average recovery has gone down in the IBC (Insolvency and Bankruptcy Code) process from 30-35 percent earlier to less than 20 percent, of late.

Down payments in water melons and wheat

Despite this grim scenario, it is a matter of concern that home sales have not declined sharply, post COVID. Indian developers may not have fancy sales strategies as their desperate Chinese counterparts who are even accepting, in lieu of cash, down payments in wheat, garlic, watermelons and peaches.

Indian developers are still a desperate lot, with the standing inventory in the top 10 cities alone being more than 7 lakh units.

80% of India’s household wealth stored in property

About 70 percent of China’s household wealth is stored in property, along with 30-40 percent of bank loan books, while land sales account for 30-40 percent of local government revenue, according to Pantheon Macroeconomics.

In comparison, around 80 percent of India’s household wealth is stored in property, with 60-80 percent of bank loan books. Isn’t India prone to more risks if the property market is deleveraged, either by policies or by market forces?

In both China and India, the debt-to-asset ratio of both the home buyers as well as the developers has increased exponentially while the debt-to-income ratio of the buyers have gone up because the property in any bigger city is just not affordable.

Most global studies have suggested that any house that costs more than five years of your gross income is not affordable. The second condition is that the EMI should not be more than 50 percent of your take-home salary. But major cities of Indian and Chinese property markets have gone way ahead of this affordability curve.

So when life’s costliest purchase get stuck, it could even turn a dove into a hawk, especially when there is a global precedent.

Are policy makers listening? Well, my guess is as good as yours.