China’s real estate crisis is escalating, raising concerns about growing risks in the banking system. Desperate homebuyers across dozens of cities are refusing to pay mortgages on unfinished homes, according to state media reports and economists at international banks. In China, real estate firms are allowed to sell homes before completing them, and customers have to start repaying mortgages before they are in possession of the new property. These funds are used to finance construction by the developers. The payment boycott comes as a growing number of projects have been delayed or stalled by a cash crunch that saw giant developer Evergrande default on its debt last year and several other companies seek protection from creditors. Home prices are also falling, meaning buyers may be locked into a property that is now worth less than they agreed to pay. Analysts fear that a payment strike among homebuyers could lead to further defaults by developers, placing additional strain on China’s banks at a time when the world’s second largest economy is struggling to recover from a sharp Covid-related slowdown. “Presales are the most common way of selling homes in China, so the stakes there are high,” Nomura analysts said in a research report on Thursday. At least seven major lenders, including Industrial and Commercial Bank of China\n \n (IDCBF), China Construction Bank\n \n (CICHF), and Agricultural Bank of China\n \n (ACGBF), said Thursday that they believed the risks were manageable, adding that they were monitoring the situation closely. Bloomberg reported that Chinese authorities were holding emergency talks with banks. According to multiple state media reports and data compiled by Shanghai-based research firm China Real Estate Information Corporation (CRIC), buyers across 18 provinces and 47 cities have stopped making payments since the end of June. Tianmu News, a state-owned digital media outlet, said Thursday that buyers of homes at 100 unfinished projects or more had jointly announced they would stop paying their mortgages. These projects are scattered across central, southern and eastern China. One media report estimated 46,000 homebuyers were involved at just 14 of those projects. “The number is still growing,” the Tianmu report said, citing statistics it had obtained from some buyers. Nomura analysts estimate that developers delivered only around 60% of homes they pre-sold between 2013 and 2020, while China’s outstanding mortgage loans rose by 26.3 trillion yuan ($3.9 trillion) in the same period. Experts say trouble has been brewing for a while, and it could lead to financial and social unrest. Citi analysts said that the boycott could boost bad debts at Chinese banks by $83 billion, and cause social instability at a time when the country is already grappling with rising protests over the deteriorating health of small, rural banks. ANZ’s senior China economist Betty Wang believes the scale of the problem is much bigger. She estimates that 1.5 trillion yuan ($223 billion) of mortgage loans, or 4% of banks’ total outstanding mortgage loans, could be affected by the movement. “What concerns us is if more home buyers cease payment, the spreading trend will not only threaten the health of the financial system but also create social issues amid the current economic downturn,” she wrote in a report on Thursday. New home prices in 70 cities fell for a ninth straight month in May, according to recent data from the National Bureau of Statistics. Property sales have also slumped, as buyers back away from the market amid rising uncertainty about their jobs and income. The trouble in China’s real estate sector began in 2020, when Beijing started cracking down on easy credit for property firms, which has resulted in a cash crunch for many major developers. Evergrande, the country’s most indebted real state firm, was labeled a defaulter last fall and is undergoing debt restructuring. The developer still has many property projects across the country that are not finished yet, according to company filings. The real estate sector accounts for as much as 30% of China’s GDP. According to the Tianmu report, buyers of an Evergrande project in Jingdezhen, Jiangxi province, fired “the first shot” in the current repayment protest. “The Evergrande Longting project in Jingdezhen must fully resume work before October 20, 2022,” they wrote in an open letter on June 30, published on the internet and widely circulated by media. “If not, all the owners who have not paid off their loans will stop repaying the mortgage,” the letter read, adding that any loss should be borne by banks, local governments, and the developer. In an editorial on Wednesday, the state-owned Securities Times warned that if more buyers suspend mortgage repayments, the property market could take another deep hit and the financial system could suffer a systemic crisis. “We must beware of the risk spreading from the repayment suspension for unfinished homes,” the paper said. Homebuyers are “the most innocent,” because they are just desperate and have no way out, it said. But if the problem is not solved, it will cause further damage. “Although financial institutions have real estate as collateral, the undelivered projects can only become bad debts. When bad debts increase, it may cause systemic financial risks,” it added.