Explained | How bad is China’s property crisis and how did it get here? 

The housing sector, which accounts for a quarter of the Chinese economic output, has faced a crisis since 2020 and thousands of home buyers are now refusing to pay their mortgages

The story so far: China, the world’s second-largest economy, is facing a crisis in its once-booming property sector. Its Central Bank, the People's Bank of China (PBOC) last week made its biggest recorded cut in the five-year Loan Prime Rate (LPR) to rein in the said crisis. The five-year LPR, which was cut by 1.5 percentage points to around 4.2 per cent, would bring down the cost of housing mortgage repayments across China.

Meanwhile, July data from China’s National Bureau of Statistics (NBS) showed that property investment fell in the country by over 12 per cent year-on-year, the steepest fall this year, per a Reuters report. The start ofnew construction by floor area fell by around 45 per cent, the biggest fall in almost a decade.

Statistical estimates from America’s National Bureau of Economic Research indicate that real estate, including allied activities, contributes as much as 29 per cent to China’s GDP and has been a key driver of its sustained economic growth. Besides, around 70 per cent of household wealth in China is stored in property.

Since early this year, however, thousands of home buyers have stopped paying their mortgages in protest of unfinished residential projects. These young people or families, who had been paying monthly mortgages at rates of 5 per cent and above, have either stopped or are threatening to stop paying their mortgages in over 300 unfinished housing projects in around 90 cities across China, according to crowd-sourced estimates quoted by The New York Times.

Read also: China property crisis is spiralling with homebuyers’ boycott

Under a popular way of buying property in China, called “pre-sales”, buyers pay for the property before it is built. According to the BBC, which quoted Julian Evans-Pritchard, a China economist at Capital Economics, “pre-sales” constitute 70-80 per cent of new housing sales in China. Developers often buy land, get loans on it to start construction, and then secure money from home buyers in pre-sales, alsousing those funds to fund other projects.

Home buyers who have gone on mortgage strikes believe that their money has been misused by property developers. Normally, home buyers deposit their money before the project is built in an accountmonitored by local authorities and banks, meaning developers are not supposed to have access to all the money at once but at fixed stages of construction.With projects remaining unfinished beyond stipulated timelines, many home buyers have resorted to living in incomplete homes.