China’s Problem With Unfinished Homes Keeps Getting Bigger

Solving that is crucial for a recovery, but the problem keeps getting bigger. More property developers are defaulting on their debt and adding to the logjam of construction delays and stalled residential developments across the country.

Potential home buyers have lost confidence in the housing market because they fear developers won’t be able to complete their projects. That sentiment has created a vicious circle as falling new home sales imperil even more companies. Households that have been waiting for years for the apartments they paid for have also become increasingly desperate for a resolution.

People who are awaiting the delivery of their apartments are collectively the largest creditors of China’s real-estate companies. Before the downturn, developers presold apartments in scores of partially built high-rise developments and promised to deliver them in one to three years. The cash from presales was a major source of funding for developers—until the housing bubble began to deflate.

Chinese authorities have told property developers—including financially stressed ones—that they need to give priority to completing and delivering the homes they have presold.

There isn’t an official tally of unfinished homes, but five of the country’s largest developers that have failed to pay their offshore debt had about $266 billion in total contract liabilities as of June—a rough proxy for the value of homes they sold but have yet to deliver. That includes around $83 billion in contract liabilities at the property giant Country Garden, which defaulted on its international debt in October. The developer said recently that it has delivered about 460,000 apartment units so far this year.

Nomura’s chief China economist, Ting Lu, reckons that there are around 20 million units of uncompleted and delayed presold homes across China. He estimated that more than $440 billion would be needed to finish those homes and predicts that Beijing will eventually have to fill that funding gap.

The huge volume of undelivered apartments has left many Chinese households in limbo. Last year frustrated Chinese citizens who had purchased partially built apartments from China Evergrande Group and other struggling developers threatened to stop paying their mortgages after experiencing lengthy construction delays.

In the ensuing months, China’s central government earmarked the equivalent of $48 billion in funding, through its policy banks and local governments, to help cash-strapped developers finish construction of projects they had presold. On top of that, the country’s central bank said it would provide large commercial banks with up to $27 billion of interest-free funding if they made loans to developers for the same purpose.

A large chunk of that money is sitting idle. Commercial banks had taken up only 3% of the zero-cost loans as of September, according to the People’s Bank of China’s latest quarterly update.

China’s Ministry of Housing and Urban-Rural Development, Ministry of Finance and other government agencies haven’t disclosed how much they have disbursed to fund the completion of homes. In August, the housing ministry said more than 1.65 million presold apartments had been completed and delivered one year after its “guarantee home delivery” initiative was launched, without saying how many remain unfinished.

Executives at some distressed property developers said they weren’t able to meet commercial banks’ lending criteria to obtain funding for their uncompleted projects. They also had difficulty getting loans from local governments and said the selection process for qualifying projects was opaque and varied from city to city.

“It all comes down to the banks’ aversion to risk,” said Bruce Pang, chief China economist at Jones Lang LaSalle.

In some cases, banks told developers that they would only grant loans if there was sufficient collateral in the projects to protect the lenders against defaults. Such collateral could include land and unsold apartments.

At the same time, only residential projects that had been largely presold and weren’t delivered on time would qualify for state aid. That often meant there wasn’t sufficient collateral to back a new loan for its construction, according to people working at property developers and industry analysts.

While extending loans to developers so they can complete homes has become a political imperative for state-owned banks, they still need to assess the risks associated with lending to unfinished projects and avoid losing money, according to analysts.“Without clear signs of a bottoming out in the sector, I think banks will tend to take a cautious view in facilitating home deliveries,” said Betty Wang, an economist with ANZ.

The housing market’s downward spiral also means the value of developers’ assets is falling, which affects how much they can borrow to finish construction of their projects, said Song Hongwei, a research director at Tongce Research Institute, which tracks and analyzes China’s real-estate market.

Some desperate homeowners have implored their city governments to provide financial help for their residential developments.

“We kindly request the government to include our project in the list,” an individual wrote on an online message board to the local government, referring to a list of unfinished properties in the port city of Tianjin that qualified for state aid. The post said the project’s developer, China Aoyuan, is no longer capable of ensuring the delivery of the properties and has left hundreds of homeowners without homes to return to. A local official replied, saying it couldn’t be confirmed that the project was part of the program.

In Zhengzhou, a city in central China’s Henan province, the project director of a unfinished residential compound there told a state-media outlet earlier this year that it had failed to secure funding from banks. The project halted construction in 2015 and became known locally as an abandoned project.

The project was eventually taken over by a state-backed developer in September. It is now near completion, according to updates on Chinese social media.

Write to Rebecca Feng at rebecca.feng@wsj.com and Cao Li at li.cao@wsj.com