China’s Property Bubble May Be Bursting

The aerial view shows residential buildings under construction by Chinese real estate developer Vanke in Hangzhou, Zhejiang Province, China, on March 15, 2024. STR/AFP via Getty Images

News Analysis

China’s property bubble—one of the nation’s key economic drivers and a source of its demographic problems—may be bursting. Property values and investments are declining, and land developers are in distress. The situation could become worse as more property units are completed and enter the market.

For years, China’s property values headed in one direction: up. Newly built homes and apartments became the favored assets of the country’s new class of landlords, who invested the fortunes accumulated in other parts of the economy. Easy money supplied by state banks and investment companies, the easing of regulations, and hyped expectations of further gains also added to the mania.

Rising property values were music to the ears of land developers, usually state-owned enterprises, and to Beijing, which could tout the contribution of construction projects to the country’s economic growth.

“The Chinese government allowed a booming real estate market to expand with few regulations. New personal wealth was created from property investments and funding construction projects that moved more citizens into the middle class,” Jerry O'Reilly, a real estate investor at Cash Home Buyers Crew, told The Epoch Times via email.

“Government officials feared slowing the expansion might create unrest when some citizens already had wealth while others were starting to invest and see huge economic boons, so they did little to regulate the industry.”

However, rising property values weren’t great for China’s average young citizens looking to purchase a home and raise a family. This could explain the country’s urgent demographic problem: the plunge in marriages and birthrates, which has far-reaching consequences for China’s ability to compete in labor-intensive industries and sustain the current economic growth.

Yet, bubbles cannot keep swelling forever, as the pool of speculators—who buy properties just on the belief that they can find other speculators willing to pay ever higher prices—dries up.

That’s when the music stops for the beneficiaries of the bubble: property prices fall, landlords are left with unsellable properties, banks and investment firms suffer mounting losses, and the government is left to foot the bill to bail out these institutions.

This happened in many countries before, from the Soviet Union in the 1950s and Nigeria in the 1960s to Japan in the early 1990s. It happened in China in the late 1990s, too, and it has happened again in the past couple of years as the country’s government bureaucrats are beginning to worry about the sheer size of the bubble and take steps to ease its impact on the broader economy.

“The housing market was 25–29 percent of China’s GDP in 2023,” O'Reilly said. “The government has finally passed new regulations to diversify the economy—a move away from the heavy reliance on property.”

These regulations accelerated the decline in property values already underway.

The average price of newly built homes in 70 Chinese cities declined at an annual rate of 5.9 percent in October, following a 5.8 percent decline in September. It marked the sixteenth consecutive month of decrease and the steepest pace since April 2015. Price declines were widespread across all major cities.

Meanwhile, property investment spending fell by 10.3 percent year over year in October, following a 10.1 percent decline in September.

While Beijing expanded regulations to tame the property bubble, the People’s Bank of China (PBC) slashed official borrowing rates to ease the impact of the shortfall from the decline in property values and investments that followed. In October, PBC governor Pan Gongsheng said the central bank might further reduce the reserve requirement ratio by 25–50 basis points by year-end to improve liquidity conditions.

However, the central bank’s efforts to ease liquidity came too late to prevent some land developers from getting into trouble. Two of China’s largest developers, Evergrande and Country Garden, for example, defaulted on major loans last year, followed by Yuzhou Group’s default a few months ago and its $6.7 billion restructuring, and Zhongzhi Enterprise Group’s recent insolvency.

“This created a wave of investor fear in the real estate sector,” O'Reilly said. “This meant fewer people bought property as an investment, and still fewer invested cash to fund new construction.”

He said the problem could worsen, as China has many prepaid units that developers still need to complete.

“The developers don’t have access to the cash to complete the sold housing units. An additional 60 million units have been completed but are still unsold,” O'Reilly said.

“That amounts to a four-year supply of housing. Investors want to avoid spending additional money to complete the prepaid units, so they sit unfinished and abandoned.”

Michael Ashley Schulman, CFA, partner, and chief investment officer of Running Point Capital Advisors, said massive property deflation has already occurred.

“Now it is a matter of picking up the pieces and ‘rebuilding’ confidence by razing excess inventory, tearing down or completing unfinished projects, and re-incentivizing home ownership through low interest rates and heavy government incentive,” he told The Epoch Times in an email.

“Unless a wholesale cleansing is done, personal real estate could be in a quagmire for years.”