Homebuyers in China are refusing to keep paying mortgages for unfinished apartments, adding to the cash crunch in the sector that could spread globally

• A growing number of homebuyers in China are refusing to pay mortgages on unfinished apartments.
• COVID lockdowns have slowed construction activity and delayed the completion of homes.

A growing number of homebuyers in China are refusing to pay their mortgages for apartments that are still under construction, adding to market concerns about an escalation in the country's real-estate debt crisis.

Buyers of homes in more than 200 projects in 75 to 80 cities are refusing to pay their mortgages, according to a Nomura note released on Thursday that was seen by Insider. This is up from fewer than 20 projects at the beginning of the week, Reuters reported on Thursday, citing media reports and analysts.

"Presales are the most common way of selling homes in China, so the stakes there are high," said Nomura analysts in another Wednesday note seen by Insider. Property developers in China can sell homes before they are completed and buyers need to start paying for them before they take possession of the units.

COVID-19 pandemic curbs have slowed construction activities and delayed the completion of apartments. Buyer sentiment has also slumped in China as movement restrictions drag on. The situation is so dire that some developers have even started accepting crops for down-payments.

Developers use mortgage payments to finance new property projects, so the fallout from non-payments are concerning as the sector is also dealing with a cash crunch that started after Beijing cracked down on excessive borrowing by property developers.

The liquidity crunch lead to real-estate giant Evergrande defaulting on its debt late last year. This spilled over to other companies as banks tightened sector-wide lending. Real estate and related industries account for up to 30% of China's GDP, so any impact would hit the world's second-largest economy hard, and could create a domino effect on China's financial system, which in turn could spill over to the rest of the world.

"The presale model has significantly increased developers' leverage, so a disorderly deleveraging may not only lead to a credit crunch for developers and massive defaults in offshore dollar bond markets, but also rising non-performing loans for banks, which sit at the center of China's financial system," Nomura analysts led by Jizhou Dong wrote in the Thursday note.

Chinese banks report 2.11 billion Chinese yuan ($312 million) in loans that are at risk to due the mortgage payment boycotts, Bloomberg reported on Friday, citing information from various banks. Authorities in China have held emergency meetings with banks to discuss the mortgage boycott, Bloomberg reported on Thursday, citing people familiar with the matter. There was no immediate solution.

The development comes at a sensitive time for China as the Chinese Communist Party is set to hold its 20th National Congress in the autumn of 2022 when President Xi Jinping is expected to secure a third term in office.