China’s Property Crisis: From Boom to Bust and the Government’s Battle to Stabilize the Market

Introduction

Nobel laureate Michael Spence’s recent warning that China must prioritize stabilizing its property market over tariff concerns underscores the severity of a crisis that has transformed the world’s largest housing boom into a catastrophic collapse.

This crisis represents one of the most significant economic challenges facing China today, eroding household wealth on an unprecedented scale and threatening the foundations of its economic model.

The Golden Era: How China Built the World’s Largest Property Bubble (1978-2021)

China’s property journey began as a radical departure from Communist orthodoxy.

Under Mao, housing was a state-provided welfare benefit, with most urban residents living in government-allocated apartments.

The system was deliberately egalitarian but chronically inadequate—by 1978, per capita residential area in urban China was merely 3.6 square meters, even lower than in 1949.

The stage was set for dramatic transformation.

Deng Xiaoping’s Revolutionary Reforms

The reform era commenced in 1980 when Deng Xiaoping delivered a landmark speech declaring that urban residents should be allowed to purchase homes and that public housing rents should reflect construction costs.

This represented a seismic ideological shift. In 1988, China’s constitution was amended to permit land transactions, establishing the legal foundation for property privatization.

However, the most transformative moment arrived in 1998 when Premier Zhu Rongji implemented comprehensive housing reforms that completely abolished the welfare housing allocation system.

The 1998 reforms created a commercial housing market virtually overnight.

State employees were encouraged to purchase their apartments at heavily subsidized prices—often for as little as $35,000 for properties in central Beijing.

Tens of millions seized this opportunity, and within years, properties that workers purchased for modest sums had appreciated 10 to 20 times in value.

People earning $100 monthly salaries suddenly found themselves in the middle class through property ownership alone.

The Mortgage Revolution and Speculative Frenzy

The government strategically positioned real estate as an engine of economic growth following the 1997 Asian Financial Crisis.

The People’s Bank of China outlined procedures for residential mortgages at subsidized interest rates in 1998, and between 1998 and 2002, the central bank lowered mortgage rates five times to encourage purchases.

By 2005, China had become Asia’s largest residential mortgage market, with mortgages accounting for 16% of all bank loans by 2012.

The housing boom reached spectacular proportions.

From 2003 to 2013, first-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen experienced average annual real housing price growth of 13.1%.

The total value of Chinese homes and developers’ inventory hit $52 trillion in 2019—twice the size of the U.S. housing market despite China’s economy being only one-third as large.

At its peak in 2021, property sales reached 18.2 trillion yuan ($2.5 trillion), and the sector accounted for 20-30% of China’s GDP.

The Structural Foundations of Excess

Several factors drove China’s property market to unsustainable heights.

Local governments became increasingly dependent on land sales revenue, with fiscal reforms making infrastructure development central to their financial security.

From 1995 to 2000, rural migrants moving across provinces grew from 3.5 million to 10 million annually, creating genuine housing demand.

However, investment motivations soon overtook residential needs.

With limited investment alternatives—a volatile stock market and strict capital controls preventing overseas investment—Chinese households poured their savings into real estate.

The lack of annual property taxes in most areas meant owners faced no holding costs for vacant units.

This created a unique phenomenon: China’s “ghost cities” filled with brand-new apartments purchased purely for investment, not habitation.

By 2017, estimates suggested 65 million to 80 million housing units stood vacant—enough to house the population of France.

The Three Red Lines: Xi Jinping’s Crackdown and the Market’s Collapse (2020-2022)

The transformation from boom to bust centered on President Xi Jinping’s ideological objection to property speculation.

In October 2017, Xi declared that “houses are for living in, not for speculation,” a phrase that would become the defining principle of his property policy.

However, the decisive blow came in August 2020 with the introduction of the “Three Red Lines” policy.

The Three Red Lines Framework

The Three Red Lines imposed strict deleveraging requirements on property developers.

Liability-to-asset ratio must be below 70% (excluding advance receipts)

Net gearing ratio (debt-to-equity) must be below 100%

Cash-to-short-term debt ratio must be at least 100%

Developers meeting all three criteria could increase debt by 15% annually. Those violating one, two, or all three criteria could grow debt by only 10%, 5%, or 0%, respectively.

This credit squeeze was devastating for an industry built on leverage and pre-sales financing.

Between June and December 2020, 90% of major developers saw improvements in their financial ratios as they scrambled to comply. But the adjustment was too rapid and too severe.

Property companies had expanded aggressively by selling apartments years before completion, using pre-sale funds to finance construction.

When credit tightened, this model collapsed spectacularly.

Evergrande: The First Domino Falls

China Evergrande Group, once the world’s most valuable real estate company with assets valued at over $300 billion, became the poster child for the crisis.

The company defaulted on its debt obligations in December 2021, triggering a cascade of developer failures.

According to China Index Holdings, 77 property developers defaulted on their debts between 2020 and August 2025.

The human cost was staggering. Construction halted on approximately 13 million apartments during 2021-2022 alone, affecting projects nationwide.

Developers had pre-sold an estimated 20 million units that remained under construction.

Homebuyers who had paid deposits and begun mortgage payments on unfinished apartments faced an impossible situation: properties they might never occupy but were legally obligated to finance.

The Mortgage Boycott Movement

In late June 2022, desperate homebuyers began organizing through online platforms.

A crowdsourced group called “WeNeedHomes” compiled a list of stalled projects where buyers threatened to stop mortgage payments unless construction resumed.

The boycott spread with alarming speed.

By late July 2022, more than 320 projects across 47 cities and 18 provinces were affected.

Conservative estimates suggested 46,000 homebuyers were involved in just 14 projects, with the total potentially reaching hundreds of thousands.

Australian bank ANZ estimated that up to $220 billion in mortgage loans were tied to unfinished projects.

Betty Wang, a senior economist at ANZ, calculated that 1.5 trillion yuan ($223 billion) in mortgage loans—representing 4% of total outstanding mortgages—could be impacted by the movement.

The threat was existential: if buyers en masse stopped payments, the stability of China’s entire financial system would be jeopardized.

The Catastrophic Wealth Destruction (2021-2025)

The property crisis has inflicted unprecedented damage on Chinese household wealth.

Real estate accounts for 50-60% of Chinese household assets—the single largest component of their balance sheets.

As property values collapsed, so too did the financial security of hundreds of millions of families.

The Scale of Losses

Estimates of wealth destruction vary but are uniformly catastrophic.

According to various analyses, Chinese households have lost between 44 trillion and 80 trillion yuan in housing wealth since the market peaked in 2021.

To contextualize this figure: even at the lower estimate, the losses exceed the entire GDP of Germany.

Bloomberg Economics calculated that every 5% decline in home prices wipes out 19 trillion yuan ($2.7 trillion) in housing wealth.

From the 2021 peak through 2024, housing prices in smaller tier-3 cities plummeted by approximately 30%, while even major cities like Beijing and Shanghai saw declines of around 10%.

As of September 2025, new home prices had fallen for 27 consecutive months.

The annual decline accelerated in 2025, with new home prices down 2.2% year-on-year in September alone.

Goldman Sachs Research warned that without government intervention, property values could fall another 20-25%, dropping them to about half their peak.

The impact extends beyond paper losses.

A 40-year-old financial worker from Shanghai named Thomas Zhou described his 2023 financial situation to Bloomberg: stock investments down 30%, salary package down 30%, investment property down 20%. “It’s just heart-breaking,” he said. “The only thing that still keeps me going is the thought of keeping my job so I can support my big family”.

Market Paralysis and Oversupply

Property sales have collapsed alongside prices.

From a peak of 18.2 trillion yuan in 2021, sales plummeted to an estimated 8.8-9 trillion yuan in 2025—a decline of approximately 50% in just four years.

S&P Global Ratings forecasts sales will fall another 6-7% in 2026, with primary home prices declining an additional 1.5-2.5%.

The inventory crisis remains staggering despite years of declining construction.

As of August 2025, completed but unsold housing totaled 762 million square meters.

He Keng, former deputy head of the National Bureau of Statistics, made headlines in September 2023 by stating that “even China’s whole population of 1.4 billion would not be enough to fill all the vacant properties”.

Research published in Nature journal in August 2025 estimated China’s housing vacancy rate may have exceeded 30% since 2021—among the highest globally.

Xi Jinping’s Government Response: Stabilization Efforts (2024-2025)

Faced with a crisis threatening economic stability and social cohesion, the Xi administration has deployed increasingly aggressive—though carefully calibrated—intervention measures.

These efforts reflect a delicate balancing act: supporting the market without abandoning Xi’s ideological opposition to speculation or creating moral hazard for reckless developers.

The White List Mechanism

In January 2024, China introduced a “white list” system for financially viable real estate projects. Under this mechanism, local authorities recommend projects to financial institutions for priority lending support.

The goal is ensuring developers can complete construction and deliver homes to buyers, thereby preventing another mortgage boycott wave.

The program expanded rapidly. By October 16, 2024, loans approved for white list projects reached 2.23 trillion yuan ($313 billion), up from 1.43 trillion yuan in September.

Officials projected the total would surpass 4 trillion yuan by year-end 2024.

Minister of Housing Ni Hong announced at an October 2024 press conference that “all eligible real estate projects will be included in the white list” and promised to widen its scope to include all compliant developments.

Results on housing deliveries showed some progress. Since the delivery campaign launched in May 2024, 2.46 million homes were completed and handed over to buyers.

Ni declared that “the bottoming out of the property market has begun,” though analysts remained skeptical.

The 300 Billion Yuan Buyback Program

Perhaps the most significant intervention came in May 2024 when the People’s Bank of China established a 300 billion yuan ($42.25 billion) relending facility for government-subsidized housing.

Local state-owned enterprises were encouraged to use these funds to purchase unsold commercial homes at “reasonable prices” and convert them to affordable housing.

The program’s potential reach was substantial. The central bank anticipated the 300 billion yuan facility could unlock an additional 500 billion yuan in total financing—approximately $69 billion combined.

This would theoretically enable purchases of about 71.6 million square meters of housing, or roughly 18.7% of unsold inventory as of June 2024.

However, implementation proved glacially slow. By late June 2024, local governments had borrowed all but 12.1 billion yuan of the 300 billion yuan fund, yet only about five cities had actually completed purchases.

By August 2024, while more than 60 cities had introduced policies allowing local SOEs to buy unsold properties, precious few transactions had materialized.

By September 2024, only 29 cities out of over 200 urged to participate had actually heeded the call.

Why the Rescue Programs Are Struggling

Multiple structural obstacles impede the buyback program’s effectiveness.

First, the economics don’t work for local governments.

Cities purchasing properties typically acquire them at 20-30% discounts to market price (cost price), but the average rental yield across 50 Chinese cities is only 2.1%—below the 3% funding cost cities incur under the relending facility. This guarantees financial losses on operations.

Second, many local governments are themselves deeply indebted and cash-strapped from the collapse of land sale revenues.

Land sales revenues plunged 44% from their 2021 peak to 4.87 trillion yuan in 2024, then fell further to 2.23 trillion yuan in just the first three quarters of 2025.

Cities lack the fiscal capacity to absorb hundreds of billions worth of housing inventory.

Third, the scale is simply too small. China Real Estate Business estimates that to reduce unsold inventory to healthy levels (18 months of sales instead of the current 33 months), the government would need to purchase 14.6 trillion yuan of housing—about 19 times the allocated funding.

Even assuming 50% discounts, approximately 7.3 trillion yuan ($1 trillion) would be required. A similar pilot program launched in 2023 with a 100 billion yuan quota saw uptake of only 2 billion yuan—just 2% utilization.

Broader Support Measures

Beyond the white list and buyback programs, Beijing has deployed an extensive toolkit of demand-side stimulus measures

Mortgage rate reductions

The government cut interest rates on existing mortgages by an average of 0.5 percentage points, saving 50 million households approximately 150 billion yuan annually.

Down payment reductions

Minimum down payments for first homes dropped to 15% and for second homes to 25%—the lowest in history.

Purchase restrictions lifted

Major cities including Beijing, Shanghai, and Shenzhen eased or eliminated restrictions on multiple property ownership.

Special bond issuances

Local governments received authorization to use special-purpose bonds to purchase unsold homes and acquire idle land from developers.

Urban renewal

The government pledged to renovate 1 million urban homes and accelerate redevelopment of “urban villages”.

In his December 2024 New Year’s address, President Xi pledged “more proactive policies to promote growth in 2025,” acknowledging that “current economic operations are encountering fresh challenges”.

At a meeting earlier in December, senior leaders committed to adopting “moderately loose monetary policy” for the first time in 14 years and pledged to issue a historic 3 trillion yuan ($411 billion) in special treasury bonds in 2025.

Limited Impact and Persistent Challenges

Despite this policy barrage, market sentiment remains fragile.

Edward Chan, director of corporate ratings at S&P Global Ratings, noted that “homebuyer sentiment is still quite volatile” and emphasized that “the government will need to persist in supporting the sector and stimulating demand to help restore homebuyers’ confidence”.

The fundamental problem, as Spence observed, is that household balance sheets have been severely damaged by falling real estate values.

Sales briefly surged 30% in October 2024 following the relaxation of purchase requirements, but this primarily reflected pent-up demand from tier-1 buyers—demand that quickly moderated, raising questions about sustainability.

In September 2025, sales of China’s 100 largest developers increased only 0.4% year-on-year, hardly a sign of robust recovery.

Most analysts expect the property sector will continue declining through at least 2026, with stabilization not anticipated until late 2026 or 2027 at the earliest.

Structural Impediments and Long-Term Outlook

The depth and persistence of China’s property crisis reflects structural challenges that resist quick fixes.

Demographics present a fundamental headwind: China’s 2020 census recorded the slowest population growth since the 1970s, and the country’s working-age population is shrinking.

Demand for new housing faces natural constraints as urbanization plateaus and family formation rates decline.

Confidence remains the most intractable problem.

Households have watched their largest asset depreciate continuously for 27 months while witnessing Evergrande, Country Garden, and 77 other developers default.

Unfinished construction projects dot the landscape as visible reminders of broken promises. Even if prices stabilize, the psychological trauma will take years to heal.

The government faces difficult trade-offs. Xi Jinping’s ideological commitment to preventing speculation limits how aggressively authorities will support prices in lower-tier cities.

Brookings Institution analysis suggests that truly addressing the crisis would require tackling “the twin problems of the collapse of China’s real estate market and the localities’ continued reliance on debt as they remain starved of sustainable sources of revenue”.

Yet comprehensive solutions—such as introducing property taxes to provide local governments with sustainable revenue—risk further depressing the market.

Economists increasingly compare China’s situation to Japan’s post-1990 property collapse and subsequent “lost decades”.

Goldman Sachs reported in October 2023 that China’s property crisis actually appears more severe than Japan’s in some respects: urban housing vacancy rates of around 20% in China versus 9% in Japan in 1990, and house price-to-income ratios of 20 times in China versus 11 times in 1990 Japan.

Economists like Hao Hong predict China’s housing slump will last for years or even a decade.

Conclusion

A Painful Transition

China’s property market has undergone a complete reversal of fortune.

What began in 1978 as a revolutionary reform that privatized housing and lifted hundreds of millions into middle-class prosperity has culminated in the world’s largest property bubble and its subsequent collapse.

The sector that once generated 20-30% of GDP now threatens to drag the economy into prolonged stagnation.

As Michael Spence correctly observed, stabilizing the property market and restoring confidence are “significantly more important” than managing tariff impacts for China’s economic future.

The challenge lies not merely in deploying stimulus funds or expanding lending quotas, but in fundamentally restructuring a growth model that became dangerously dependent on ever-rising property values.

With 50-60% of household wealth concentrated in real estate, millions of families in limbo waiting for unfinished apartments, and local governments starved of land-sale revenues, the crisis touches virtually every corner of Chinese economic life.[cnn +4]

The government’s response—white lists, buyback programs, mortgage rate cuts, and loosened restrictions—represents serious effort, but the scale and speed remain insufficient relative to the problem’s magnitude.

What China built in four decades of property boom is unwinding over a half-decade of bust, and the bottom remains elusive.

The next phase of this crisis will test not only China’s economic resilience but also the social compact between the Communist Party and the middle class it created through property wealth—and is now watching evaporate.