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Mainland China’s falling property prices and a weak economy could lead to rising loan defaults, adding to a surfeit of foreclosed homes and further extending the years-long slump, according to UBS.
The number of apartments seized by banks from small businesses could reach more than 2.4 million by 2027, said John Lam, head of China property research at the Swiss bank, on Tuesday. Most small businesses on the mainland pledge property as collateral for loans.
The sale of these foreclosed properties could impact about a fourth of China’s new home sales annually and further drive down the prices of second-hand homes, Lam said. It was “a key risk we are concerned about”, he added.
China ramped up issuing business operating loans since the Covid-19 pandemic to support small and individually owned businesses. At the end of September, outstanding loans stood at 36.1 trillion yuan (US$5.1 trillion), roughly triple the pre-pandemic level, according to Lam.
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China’s ‘nail houses’: thorn in urban developers’ side or victims of redevelopment?
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Meanwhile, China’s property prices have fallen some 35 per cent from their peak, leading to a slump in the value of their collateral.
“Facing negative equity, the homeowners might end up in a situation where they have to pay the shortfall,” said Lam in a webinar. “They might have to sell the properties themselves or will be forced to sell them.”
