China’s real estate market remains in a prolonged adjustment phase, visible in two key aspects. First, housing prices, the core indicator of the market, resumed their downward trend after a brief stabilization in the first quarter. Prices for both new and secondhand homes fell again in first-tier cities such as Guangzhou and Shenzhen in Guangdong province.
By the end of June, new home prices in 70 large and medium-sized cities had recorded month-on-month declines for 25 consecutive months, with 56 cities reporting a drop in June. Among first-tier cities, only Shanghai registered a price increase. Pressure on secondhand housing prices was even more pronounced.
Second, since May, both property sales and investments have posted year-on-year declines, while the secondhand housing market has shown clear signs of “trading volume at the expense of price”.
In the first half, the sales area of commercial housing, sales revenue, property investments, and funds in place for real estate enterprises all dropped significantly compared with the same period in 2021 — down 42.4 percent, 49.1 percent, 30.4 percent and 51.2 percent, respectively. Unsold inventory rose by 50.6 percent.
Real estate, once a major driver of growth, has shifted from a positive contributor to GDP to a drag that other sectors need to work harder to offset. The sector’s value-added share of GDP fell from a peak of 8.3 percent in 2020 to 6.3 percent in 2024. Its contribution to GDP growth also turned negative, standing at 0.34 percentage point in 2021, — 0.23 in 2022, — 0.05 in 2023 and — 0.12 in 2024.
Although the sector’s first half contribution rebounded slightly to 0.07 percentage point, it remains at a historical low, inconsistent with its role as a pillar industry. Value-added output grew just 1 percent year-on-year, 4.3 percentage points lower than overall GDP growth.
Compared with previous years of deep adjustment and weak confidence, the property market has shown tentative signs of stabilization thanks to policy support. Yet from a macroeconomic perspective, real estate remains the single largest drag on growth.
With domestic consumption still in need of a boost and exports likely to come under pressure in the second half, the growth gap caused by the real estate downturn is more pronounced. Overall, the real estate sector is gradually moving away from the risk of a hard landing toward a longer-term, more moderate but sustained adjustment cycle.
Three issues merit urgent attention. First, falling housing prices are the crux of current problems. Price declines erode household assets, dampening consumption. The “buy on the rise, not on the fall” psychology also discourages home purchases, weakening sales and developers’ cash flow, leading to worsening liquidity pressure.
There are some forces responsible for driving the decline in prices. Developers are now cutting prices to survive. Facing tight cash flow pressure and heavy debt burdens, many firms are resorting to steep discounts to speed up sales, dragging down prices in both new and secondhand markets.
In addition, distressed sales are hitting the market. Troubled firms and households are offloading properties, including via public auctions, at prices far below normal levels, thus exerting further downward pressure on local secondhand markets.
Also, weak confidence is fueling supply issues. The continued downtrend in prices has undermined confidence, prompting more owners to put idle or rental homes up for sale, worsening the supply-demand imbalance.
What’s more, product upgrading is having a crowding-out effect. High-quality “good homes”, launched to meet people’s rising living standards, are a suitable way for the transformation to take place. But they have also diverted demand away from standard housing stock, forcing prices lower as buyers either wait or push for discounts.
Second, falling prices may trigger financial risks and social stability concerns. With developers under cash flow stress, failure to revive sales could heighten debt and liquidity risks. Combined with unstable employment and incomes, price declines call for close monitoring of potential risks in the banking system and broader society.
Third, local governments are stuck in a cycle of “property downturn — declining fiscal revenue — weakened ability to stabilize property”. Reliant for years on land sales, many local governments have seen fiscal revenue shrink as the market slumps. This has eroded their capacity to stabilize the sector through measures such as purchasing unsold housing or revitalizing idle land.
At the central level, policies have been introduced, including allowing localities to issue special-purpose bonds to fund purchases of unsold housing and land for use as affordable housing. But the scale of such bonds is limited, adding to local debt burdens.
More importantly, cities most in need of destocking are often smaller ones facing population outflows, where demand for new affordable housing is weak. This limits local governments’ willingness and ability to adopt such measures, underscoring the need for stronger external support.
The “bottom” for housing prices is not a fixed number, but a dynamic range shaped by several factors.
When housing prices fall enough to bring rental returns close to or above yields from low-risk assets such as government bonds or bank deposits, property regains investment value, reducing supply pressure and forming a market-driven “bottom”.
Key ratios such as housing prices-to-income and mortgage burdens relative to income determine affordability. Once these metrics return to reasonable levels, pent-up demand is often unleashed, providing strong support.
Cities with sustained inflows of population, solid industrial bases and strong public services (education, healthcare) hold higher long-term value due to scarcity of resources and persistent demand.
Market stabilization typically follows the sequence of “volume, price, expectations”. Sustained recovery in transaction volume is the first signal, usually seen in consecutive month-on-month and year-on-year growth in sales of both new and secondhand homes.
Next comes price stabilization, marked by narrowing declines, small gains in key areas, shrinking price gaps in negotiations and a slowdown in listing growth.
Another sign is a steady fall in unsold inventory and shorter destocking cycles. Developers’ renewed participation in land auctions and rising premiums also signal improved confidence.
Finally, sentiment shifts as media coverage turns neutral or positive, foot traffic increases at showrooms, and agents become more active, all pointing to a market bottoming out.
To break the current deadlock and restore confidence, bold, systemic policy action at the central level is required.
Policy recommendations include establishing a national real estate stabilization fund — possibly around 2 trillion yuan ($280 billion) — financed by treasury bonds. This would support the delivery of presold homes to protect buyers’ rights and acquire idle land from developers to ease liquidity strains. Such moves would both address urgent needs and send a strong signal of determination.
Increasing fiscal support for local governments will offset lost land revenue, expand financial space and reduce unnecessary land supply, while promoting buybacks of idle land.
Tackling developer liquidity risks through industry consolidation will be of great benefit. Encouraging stronger developers to acquire distressed projects, supported by targeted financial measures such as dedicated merger loans and optimized “white lists” for financing, is advisable.
Further loosening restrictions in core cities such as Beijing, Shanghai and Shenzhen to release suppressed demand, leveraging their role as market bellwethers, should be encouraged, along with lowering transaction costs, including guiding down mortgage rates and cutting taxes and fees, to ease household burdens.
Introducing flexible mortgage repayment mechanisms to prevent social risks, and allowing households facing temporary repayment difficulties to apply for extensions or revised repayment plans should be prioritized, as should refining financing coordination to avoid one-size-fits-all regulatory approaches, ensuring sufficient liquidity flows to developers under the “white list” system, and easing overly strict controls on presale funds without compromising delivery security.
Piecemeal, incremental adjustments are insufficient to shift expectations. A bold, systemic and comprehensive policy package is needed to break the downward spiral and restore stability.
Over the short term, the priority is to “prevent risks and stabilize expectations”. Over the long term, once the market stabilizes, this adjustment should serve as an opportunity to accelerate the establishment of a new housing development model — one that emphasizes both renting and buying, aligns land supply with population flows, and delivers high-quality housing.
Luo Zhiheng is chief economist of Yuekai Securities, and Ma Jiajin is an analyst of Yuekai Securities.
The views do not necessarily reflect those of China Daily.