ANALYSIS: China’s Real Estate Crisis Deepens Despite Desperate Bailout Measures

This photo taken on June 20, 2023 shows a view of a complex of unfinished apartment buildings in Xinzheng City in Zhengzhou, China's central Henan Province. (Pedro Pardo/AFP via Getty Images)

The Chinese regime has been attempting to save China’s crumbling real estate market with frequent bailout measures, but the effect has been minimal since the overall housing prices have been falling for seven months in a row.

The plunging property prices will severely damage the interests of the real estate sector and will hurt China’s overall economy since real estate accounts for over 30 percent of the country’s GDP.

Loosening Restrictions

On Jan. 30, Shanghai officially announced that it would remove some restrictions on property purchases by non-residents living in the city.

In China, the regime maintains a “household registration” system for all citizens, and every individual has to be registered with one specific municipality.

Changing household registrations may be a lengthy and bureaucratic process.

In the past, cities like Shanghai restricted property purchases only to residents who were registered in Shanghai, and therefore, non-residents who moved to the city may not be eligible to buy unless they satisfy the city’s strict requirements.

Since September last year, major cities across China have relaxed or completely abolished property purchase restrictions. However, these stimulus measures have had little effect on saving the property market.

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On Jan. 17, the National Bureau of Statistics of China (NBSC) released data showing that the prices of newly built homes in December last year suffered the sharpest decline since February 2015, the seventh consecutive monthly decline.

In the second-hand property market, prices in 70 large cities across China fell, also for seven consecutive months.

The continued downturn in real estate has deprived local authorities of their biggest revenue source—land sales.

In mid-December last year, Beijing announced that the city was lowering the down payment percentage for second homes to 40 percent or 50 percent from the previous 60 percent or 80 percent. For first homes, the requirement was lowered to 30 percent from the previous 35 percent or 40 percent. Shanghai followed suit in the same month.

The Chinese regime is also considering providing banking and financial support to a group of struggling real estate developers. Such a program would allow banks to offer them unsecured loans.

However, these measures have not only failed to slow China’s real estate decline but have accelerated it.

Failing Bailout Measures 

According to the NBSC, commercial real estate sales fell by 23 percent year-on-year in December last year. China’s total property sales for 2023 were down 6.5 percent year-on-year. Monthly sales in December last year alone were down 17.1 percent from a year earlier. In terms of real estate investments, 2023 saw a significant decline of 9.6 percent.

The demand for mortgages in China remains weak. Residential new construction, a key measure of future real estate investment, fell 21 percent year-on-year, signaling continued weak demand in the sector, according to HSBC Global Research.

Shares of Chinese and Hong Kong real estate developers experienced a major sell-off in January. The Hang Seng Mainland Properties Index, which tracks Chinese real estate developers, fell a cumulative 9.5 percent.

An aerial photo shows deserted villas in a suburb of Shenyang in China's northeastern Liaoning Province on March 31, 2023. China's real estate industry is in a record-breaking slump. (Jade Gao/AFP via Getty Images)

Alicia García-Herrero, chief economist for the Asia-Pacific region at Natixis, says China’s housing market has not touched the bottom yet and still has a long way to go.

Nomura analysts Jizhou Dong and Riley Jin also said, “There has been no sign that the sector’s fundamentals have bottomed out.”

These are not only the predictions of international economists but also the views of economists in China, who are subject to censorship if they express views inconsistent with the ruling communist regime.

Yao Yang, director of the National School of Development of Peking University, said of the real estate market in January: “Why is it that the purchase restrictions have been lifted everywhere, but there is still a lack of enthusiasm from the residents to buy houses? It’s because the property prices have not fallen enough for the people to buy.”

He explained that property prices remained high because the local authorities did not want the prices to fall further since it would bring them significant revenue losses. However, if the prices do not fall in place, the people are still unlikely to buy.

China’s Property Prices Compared to the US

According to Fidelity Investments, an American multinational financial services corporation, the total home price should not exceed three to five times the annual gross household income for most people and families.

The average cost of a new urban home in the United States is 4.3 times the average American income. However, China’s property price-to-income ratio far exceeds this figure.

The average cost of a new urban home in China is 29.8 times the national average income. In other words, China’s price-to-income ratio is about seven times that of the United States.

According to Fidelity’s estimate, China’s current housing prices would have to fall by 83 percent to reach an “affordable” level for the general public.

However, housing prices in China’s major cities are even higher. Beijing, China’s capital, has a housing price-to-income ratio nine times that of Washington, D.C., and about 19 times that of Houston or Dallas. Shanghai, China’s financial capital, has a housing price-to-income ratio of about four times that of New York City.

In addition, the average size of American homes is generally larger than Chinese homes. So the living space per square foot in Chinese homes is on average 30 to 50 times higher than in the United States.

A man works at a construction site of a residential skyscraper in Shanghai on Nov. 29, 2016. (Johannes Eisele/AFP via Getty Images)

Housing prices in China are arguably the most expensive in the world. In a study of average housing affordability in 480 cities around the world (including 131 American cities and seven Chinese cities), all seven Chinese cities in the study appeared in the top 60 most expensive cities, with five of them in the top 16. Shenzhen, Beijing, and Shanghai are the three most expensive cities in the world.

However, the decline in property prices is a crisis for the Chinese regime and real estate developers.

Sun Hongbin, a Chinese-American real estate developer and majority owner of Sunac, said that if property prices fall by more than 30 percent, almost all real estate companies in China will go bankrupt, having a huge negative impact on the economy and government finances.

Currently, the number of Chinese who can afford to own a home is still a minority. For the majority, even if they save half of their monthly income to buy a new home, they will have saved only one-third of what they need by the time they retire.