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No quick recovery for China’s falling home prices

Experts say the property sector has a structural issue that may take as long as 20 years to rectify.

China’s home prices have continued to drop, extending the decline in January as newly-built and second-hand property prices slid further, according to data from the country’s statistics bureau.

Prices of new homes declined by 0.5% in January from a year ago, the drop wider in major cities like Beijing and Shanghai compared to second- and third-tier places. Those for the secondary market widened 1.4 percentage points to a 4.9% decrease in first-tier cities, said the National Statistics Bureau on Friday. 

The freefall in prices added to the suffering of millions of homeowners who are burdened with mortgages and the pressure of monthly payments as the economy stutters. If the properties were bought at a high price which since has plunged beyond the purchase level, monthly payments would be more painful. 

“The price of this house now is so low to the extent that the entire down payment [amount] has been written off,” lamented a YouTube travel blogger with nearly 300,000 followers called Bacon, in a video at the end of last year. 

Bacon complained that he bought an apartment in northern Chinese province of Shaanxi’s Xixian New District at a price of 11,000 yuan (US$1,528) per square meter in 2019. The price shot up to 16,000 yuan at one point post COVID-19 epidemic, but has since fallen to less than 10,000 yuan.

The high interest rate, however, added insult to injury for his family, and they opted to pay back some of the principal borrowed.

“It has been four years, and we have repaid 31,000 yuan of the principal but the interest paid is over 200,000 yuan. Fortunately, the bank has lowered the interest rate. When we took  the loan, it was 5.6%, and now it is down to 4.2%.”

The district is a national-level grade development area, Bacon said. Yet, foreclosed apartments are common and more than 100 units are up for sale. Many were advertised with urgency: “the landlord is in a hurry to sell; price drops and bank to cut off loan.”

“In hindsight … [the area] was just for land speculation and selling properties. There is really nothing here except high prices.”

Further south, in southwestern Chongqing city, an aggrieved homeowner who goes by Chen Yi, took to social media to complain that the value of the 1 million yuan apartment he paid for in 2021 has dropped by 300,000 yuan, but he still has to pay more than 3,000 yuan in monthly mortgage.

“It’s like you only have 5 yuan, but you have to spend 10 yuan a month,” he told Radio Free Asia, adding that he regretted the purchase “because the price dropped after I bought it.”

Freefalling prices

According to the “100 Cities Price Index Report” by the real estate market analysis firm Zhongzhi Research Institute, the average price of second-hand residential properties in 100 key Chinese cities in January fell to 15,230 yuan per square meter, a near 4% drop from a year ago.

In the newly built housing segment, prices have fluctuated in more than two years since Nov. 2021.

Another regretful homeowner is a 40-year-old who goes by Wu Qiming. Wu said purchased his property, egged on by his family who held the traditional concept that “only when you own a home, you have laid your foundation.” So Wu took out a loan of more than 500,000 yuan in 2015 to buy a place in a third-tier inland city in a northern coastal province.

Then the pandemic hit.

“In the three years that the Wuhan Coronavirus pandemic raged on, my family’s income was almost zero. I didn’t repay the loan for about seven months and was sued by the bank.”

Following numerous rounds of  negotiations, his property was spared from being auctioned off. The judge told him that there were too many foreclosures in their city, and even if Wu’s property was auctioned, it was unlikely to be sold within three years.

Foreclosure auctions in China have been on the rise since 2020, hitting a record of 796,000 units in 2023, an increase of 36.7% over the previous year, according to data from the China Index Academy. About half are residential properties, a clear indication of the economic brunt bore by mortgage borrowers.

Although Wu’s apartment escaped foreclosure, it was expropriated by the government in 2022 to be demolished and rebuilt. But it was a “turning point” because the authorities not only promised to provide him with a relocation house, but also paid a compensation fee to make up for the difference in floor space. The fee was enough to pay off the mortgage, he said.

However, the path remains bumpy, as the local government has no money to build the relocation homes. While the rental for his temporary home is paid by the government, he’s not sure when authorities will pull the plug.

When asked if he would ever purchase a property again, Wu’s answer was a definitive no. 

“I will never buy another house, no matter how cheap it is.”

No confidence

Eroding investor confidence in the property market doesn’t bode well for the sector which in turn affects broader economic growth, where the real estate industry has been a major driver. The rapid demise of the property market began when the biggest developers like Evergrande and Country Garden sparked off a series of defaults after years of overleveraged and bad investments, weighing on the banking system. It has also piled on debts for local authorities which relied on land sales to fund infrastructure development and governmental operations.

A view of an unfinished residential compound developed by China Evergrande Group in the outskirts of Shijiazhuang, Hebei province, China, Feb. 1, 2024. (Tingshu Wang/Reuters)

In an apparent stop-gap measure, Beijing is pushing banks to support its “white list” of approved projects. As of Feb. 20, 162 projects across 57 cities have been granted a total of 29.4 billion yuan in loans, compared to 11.3 billion yuan before the Lunar New Year holidays, China’s official Xinhua news agency reported, citing the state-owned Economic Daily.

Some 1,292 real estate companies filed for bankruptcy between 2020 and 2023, according to China Real Estate Network. Hong Kong-listed Evergrande, once the poster developer, was ordered by a Hong Kong court to liquidate earlier this year after failing to pay 2.5 trillion yuan in debt. Chinese state media reported that it has as many as 1.62 million units of “unfinished properties”, affecting 6 million owners.

The property sector’s boom to bust path can be attributed to the government’s control measures, marked by a tightening of loans in 2017 and 2018, which heeded Chinese President Xi Jinping’s policy that “homes are for living, not speculating” introduced in 2016, a time when prices were at a high level, pointed out Liu Jinxing, a 17-year industry specialist who now lives in the United States. 

“The real estate industry is a capital-intensive industry. Once there is a loan shortage, like some places restricting purchases and mortgage loans, and more importantly, recalling real estate development loans while limiting lending, it will sharply reduce developers’ capital liquidity.”

This means real estate companies can only rely on home sales income to pay off their credit and liabilities, which is stressful. The COVID-19 pandemic worsened their plight.

Zou Tao, a real estate investment expert who in 2006 advocated the movement of not buying a house in Shenzhen, believes that many local governments, because of the intricate ties to the property sector, are effectively insolvent.

Land sales are a fast and non-costly way for these local officials to score economic achievement and political equity, which leads to promotions.

“But this development model is actually very harmful, and has led to today’s situation with many unfinished buildings.”

A Chinese government propaganda billboard with the words China Dream is erected in front of a property construction site in Beijing, China. The nation’s real estate sector is in a crisis that authorities are struggling to fix. (Andy Wong/AP)

Bottomed out prices?

A real estate industry professional in Shanghai who goes by Liu Yu doesn’t think so.

Although prices have fallen by 13% to 20% since last year, compared with 2021’s peak level, demand hasn’t increased as the number of consumer groups viewing properties went from between eight to 10 a month, to three to four.  

Large-scale layoffs in Shanghai and a tanking stock market add to the property slump, Liu said, adding that it didn’t mean Shanghainese “don’t have money, but they don’t dare make the move.”

Zou pointed out that there’s a shift in how Chinese people view a property – value as an asset during the past 20 years of property boom no longer applies. In the future, when properties are seen less as additional investment and financial tools, and more for self use, prices will slowly recover. “It will take at least five years for [house prices] to slowly recover,” Zou said.

However, Wu Jialong, an economist based in Taipei, believes that five to 10 years is not enough, taking a leaf from the Japanese experience, and thus projecting at least 20 or even 30 years for China to get out of the current gloom.

Wu said China has fallen into debt-type deflation as companies and individuals are under pressure to repay debts, so they have to sell off assets. 

“The more the selling, the lower the asset prices. The lower they fall, the less cash can be mobilized by selling assets. So we had to sell more assets, [entering] this vicious cycle.”

Even after more than 20 years, he said the Japanese economy has not yet fully recovered.

Translated by RFA staff. Edited by Taejun Kang and Mike Firn.

This content originally appeared on Radio Free Asia and was authored by By Stacy Hsu for RFA Mandarin and RFA Staff.

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