Unraveling the Crisis: The Ongoing Struggles in China’s Real Estate Market

Christian Baghai
5 min readMay 29, 2024

The Chinese real estate market has long been a cornerstone of the country’s economic growth, contributing significantly to GDP and providing substantial demand for key commodities like steel, aluminum, and copper. However, this sector is currently facing profound and multifaceted challenges that are impeding its stability and growth. These challenges stem from several interlinked factors, including debt overhang, regulatory tightening, and shifting market dynamics.

Debt and Liquidity Crisis

One of the most critical issues plaguing the Chinese real estate market is the severe debt crisis among major property developers. The situation has been exacerbated by the Chinese government’s “Three Red Lines” policy introduced in 2020, which aims to curb excessive borrowing and improve financial health across the sector. This policy has imposed strict limits on debt relative to assets, equity, and cash flows, leading to a liquidity crunch for many developers. Evergrande’s highly publicized default in 2021, with liabilities exceeding $300 billion, was a stark manifestation of these pressures. This default triggered a ripple effect, impacting other major developers such as Country Garden Holdings and Sino-Ocean Group, and resulting in widespread financial distress within the sector.

Further compounding the crisis, regulatory changes in 2021 restricted financial institutions from providing fresh liquidity to local government financing vehicles, forcing local governments to raise funds through bond issuance under stricter oversight. This has added another layer of financial strain on developers reliant on local government funding. The broader implications are significant, with an expected rise in nonperforming assets for Chinese banks and heightened credit losses, exacerbating the financial instability in the market.

Declining Property Sales and Prices

The market has also been hit by declining property sales and falling home prices. Analysts predict that property sales could drop by 20–25% in 2024 from 2022 levels, potentially pushing China’s GDP growth down to as low as 2.9%, far below the government’s target of around 5%. This decline is driven by weak consumer confidence and oversupply issues, with many homeowners looking to offload second or third properties in anticipation of further price declines. The situation is aggravated by demographic shifts, such as an aging population reducing the demand for new housing, and economic uncertainties leading to a cautious market stance.

The impact of these trends has been pronounced in both high-tier and lower-tier cities, though the recovery trajectories differ. First-tier cities like Beijing and Shanghai might see slight improvements due to policy relaxations, whereas lower-tier cities continue to struggle with deep discounts and low buyer confidence. This dynamic creates a negative feedback loop where declining sales further strain developers’ finances, leading to delayed project completions and further eroding buyer confidence. The Chinese government has attempted to mitigate the crisis through measures like reducing mortgage rates and down payment requirements, yet these interventions have so far failed to stabilize the market comprehensively.

Impact on Related Sectors

The repercussions of the real estate downturn extend beyond property developers, affecting a wide range of sectors. The construction industry, which is a significant consumer of steel, aluminum, and copper, is witnessing a notable decrease in demand. For instance, China’s steel consumption by the property sector fell from 36.2% in 2020 to 30.8% in 2023, with further declines expected in 2024. Similarly, the demand for aluminum and copper, heavily used in construction and home appliances, has also diminished. This reduction in demand is impacting global commodity markets, leading to lower prices and reduced export volumes from major producers.

Additionally, local governments in China, which heavily rely on land sales for revenue, are facing severe fiscal pressures due to the slowdown in real estate transactions. This situation is exacerbated by the banking sector’s exposure to real estate, with rising non-performing asset (NPA) ratios posing a threat to financial stability. The potential for defaults on loans extended to developers is a significant risk, potentially triggering a cascade of financial instability across the banking sector.

Government and Policy Responses

In response to these challenges, the Chinese government has been actively attempting to stabilize the real estate market through various measures. These efforts include easing some of the previously stringent regulatory controls, providing financial support to distressed developers, and introducing incentives aimed at boosting homebuyer confidence. For example, the government has implemented policy interventions such as easing lending restrictions, offering property tax breaks, and potentially injecting significant funds into the market through low-cost homebuyer loans.

Despite these initiatives, experts suggest that a full recovery of the real estate sector could take several years. The challenges are deep-rooted, with issues like oversupply and significant debt burdens requiring substantial structural adjustments. The oversupply of vacant homes, particularly in smaller cities, and demographic shifts such as a slowing population growth and declining marriage rates, further complicate the path to recovery. Additionally, the broader economic environment, characterized by a slowing GDP growth and weakening consumer confidence, adds to the complexity of achieving a sustainable rebound in the real estate market.

The government’s focus is not only on immediate stabilization but also on ensuring a smoother transition to a more sustainable economic model. This involves managing the risks associated with high debt levels and avoiding the pitfalls of aggressive speculative practices that have characterized the market in the past. However, the effectiveness of these measures remains uncertain, with many analysts predicting a prolonged period of adjustment and slow recovery.

Long-term Outlook

Looking ahead, the long-term recovery of the Chinese real estate market will likely depend on the government’s ability to balance immediate stabilization efforts with the need for deeper reforms. This includes enhancing financial regulations, supporting sustainable urban development, and encouraging alternative investment avenues for households. Analysts project that it might take four to six years for the market to absorb the existing excess supply and stabilize property prices effectively. This timeline, however, could be influenced by several factors, including the pace at which distressed developers are restructured and how quickly consumer confidence in the housing market is restored.

The Chinese government has implemented a series of measures to stabilize the market, such as easing mortgage restrictions and providing property tax breaks. These interventions aim to boost demand and support prices, particularly in higher-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen, where demand remains relatively stronger. In contrast, lower-tier cities are likely to experience prolonged periods of price correction and weaker demand due to significant oversupply and demographic challenges.

In conclusion, the setbacks in China’s real estate sector are a complex interplay of debt overhang, regulatory adjustments, and market dynamics. The sector’s recovery will be further complicated by broader economic challenges, including slowing population growth and changing demographics, which reduce the long-term demand for new housing. Additionally, the potential for financial instability remains a concern, as banks heavily exposed to the real estate sector face increased risks of bad loans.

While the government’s interventions provide some relief, the path to recovery is fraught with challenges that require coordinated and sustained efforts across multiple fronts. The broader economic implications of the real estate sector’s troubles will continue to be closely watched both within China and globally. The potential for ripple effects across related industries, such as construction and manufacturing, highlights the need for a cautious and strategic approach to policy-making to ensure sustainable growth and financial stability.