Recently, real estate prices have plummeted in Beijing and several other cities, with some mainland scholars believing that prices need to drop another 40% for the real estate market to correct. Experts attribute the sharp decline in prices to three main factors, primarily structural issues; the real estate, bond, stock, and currency markets are experiencing significant depreciation due to inadequate government intervention, leading to a vicious cycle in the Chinese economy.
Residents in various cities have taken to social media to express their difficulties as they face unemployment and the need to sell their homes, only to incur significant losses due to the sharp decline in property values, leaving their efforts futile.
A couple working in Beijing shared a video saying, “We finally sold our house today.” The wife mentioned that selling the house was a last resort because her husband, who worked in IT in Beijing, was laid off at the age of 35. With a combined annual income of around 400,000 yuan, now both unemployed with two children to support and aging parents to care for, they had no choice but to sell their house.
“Selling the house is like a bamboo basket fetching water in vain,” she explained. They purchased the property at 22,000 yuan per square meter, totaling 3.08 million yuan for 140 square meters. When they sold it at 7,800 yuan per square meter, they only received 1.1 million yuan, resulting in a loss of 1.98 million yuan in property value alone, along with mortgage payments and renovation costs, leading to a total loss of 2.68 million yuan.
“With a remaining mortgage of over 1.8 million yuan and the house selling for only 1.1 million yuan, there is still a difference of over 700,000 yuan that we need to continue repaying…”
Furthermore, the “Tianjin Shouchuang New Beijing Peninsula Project” in Wuqing, Tianjin, saw a significant drop in prices from 1.6 million yuan to 390,000 yuan, a drastic decline termed as “knee-cut,” which has recently gone viral.
According to a report by “China Real Estate News,” this development saw prices peak at 20,000 yuan per square meter from 2016 to early 2017, with an 83-square-meter apartment priced at around 1.6 million yuan.
Due to factors like purchase restrictions and the pandemic, the project quickly cooled off, resulting in a steep decline in property prices. Currently, new homes are priced as low as 7,000 yuan per square meter, with a 69-square-meter two-bedroom apartment selling for only around 490,000 yuan, while the prices of second-hand homes have dropped even further, with some going as low as 390,000 yuan per unit.
Data from Fang.com shows that from 2021 to 2024, second-hand housing prices in Wuqing have been consistently declining. In May of this year, the area saw a decrease of 16.42% in transaction volume, with 1,090 units sold.
Not only in first-tier cities but also in second and third-tier cities, reports of sharp declines in housing prices have emerged on social media.
Recently, a self-media personality named “Xiao Ma” revealed that housing prices in Jurong, near Nanjing, have dropped from 13,000 yuan per square meter to 3,000 yuan per square meter, leaving homebuyers disheartened.
Another self-media personality, “Xiao Wang” from Zhengzhou, Henan, shared a video on June 28, showing a lakefront property in Jiaoyu Town east of Zhengzhou, developed by Evergrande, dropping from over 11,000 yuan per square meter to just over 3,000 yuan.
Houses in Nanchang, Jiangxi, have seen a 30% price reduction. A resident of Hunan named “Xiao Hua” recently stated that she had to sell her property in Nanchang, Jiangxi, as she had debts to pay off. She purchased the house for around 1 million yuan but sold it for 700,000 yuan, causing her great distress.
American economist David Huang analyzed the sharp decline in the Chinese real estate market, pointing out three main underlying causes.
First, he attributed the downward pressure on the Chinese economy since the US-China trade war in 2018 to the diminishing economic growth and the waning engine of exports, resulting in an overall economic situation below expectations. As a major investment asset, real estate prices are inevitably on a downward trend.
Secondly, he stated, “It is also related to the stagnation of China’s real estate market itself. The three red lines implemented around 2020 have been putting pressure on the real estate market, leading to financing difficulties for many real estate companies who struggle to sell their properties, facing insolvency and accelerating the collapse of the real estate market.”
“Thirdly, it is related to a peculiar phenomenon in the Chinese real estate market where the high prices in core urban areas have prompted speculation in surrounding areas lacking economic support, deceiving and enticing people to invest in properties without viable economic foundations.”
Huang explained that the dramatic price cuts primarily affect these non-core cities, caused by excessive speculation without economic foundations or support in those regions.
“In the wake of economic downturns, these areas experience sharp drops in prices, attributing the three main causes of the significant declines to external factors, internal economic developments in the real estate sector, and inappropriate policy measures.”
Researcher Wang Guochen from the Chinese Academy of Economic Research believed that the structural factors in the Chinese real estate market are the root cause of the current problems, with factors such as lack of funds and confidence hindering people from buying new homes. Therefore, if mainland China’s fiscal resources remain insufficient, real estate prices will continue to decline.
As for how much further prices need to drop to hit bottom, Professor Yao Yang from Peking University mentioned in an interview with mainland media at the end of June during the Summer Davos Forum that prices need to fall by 40% for the market to correct.
Comparing the situation to the aftermath of the US financial crisis, where prices dropped quickly and deeply, he pointed out that the adjustment process in China has been prolonged with insufficient declines. The situation in Japan presents a long-term scenario of continuous declines with more significant drops.
However, Huang disagreed with the notion that a 40% drop is necessary for correction in the Chinese real estate market, considering its distinctive characteristics. He proposed that beyond the core areas, many other real estate markets in China may not even stabilize with a one-third price cut and lack subsequent buyer intervention, indicating severe market differentiation requiring a nuanced approach.
Regarding the real estate market, he opined that the housing market is oversupplied, commercial real estate faces similar challenges, and industrial real estate is in a more critical situation due to failed relocation policies causing bankruptcies and hindering industrial transformation.
“The real estate market in the core areas may find some initial stability by the end of this year or early next year, but a recovery is unlikely until at least next year. As for the industrial real estate sector, we may not see a bottom anytime soon, and this is not necessarily related to the extent of the decline.”
Wang Guochen also suggested that the claims of mainland scholars that prices would drop by 40% are unrealistic. He anticipated a financial storm by the end of the year unless the Beijing authorities resort to massive currency printing to address the crisis. However, without an injection of 10 trillion yuan, the situation is likely to worsen.
The Chinese Communist Party (CCP) has been continuously rolling out market rescue measures, with the most significant being the “517 measures,” aiming to have local governments purchase excess property stocks and establish a 300 billion yuan (approximately 41 billion US dollars) fund for guaranteed housing refinancing.
However, Nomura Securities estimates that there are still as many as 20 to 30 million incomplete housing units in China, requiring the government to spend at least 440 billion US dollars to complete these properties and alleviate the severe impact on the real estate market and the broader economy.
Wang Guochen suggested, “Hurry up and print 10 trillion yuan, although it may be too late, but it is necessary to quickly address the issue of vacant properties owned by large developers and unfinished buildings, allowing state-owned enterprises to take over the completion.”
“The problem is, as exposed recently, state-owned enterprises are involved in deception, and banks are engaged in auditing scandals, indicating that many banks are also falsifying information. Therefore, both state-owned enterprises and state-owned banks are out of funds, not to mention local governments facing a tax review dating back 30 years, revealing their financial struggles.”
He commented that it seems Beijing is not inclined to solve this problem, which could trigger a systemic crisis from the real estate storm leading to debt defaults, plummeting stock prices—recently dropping below 3,000 points—and now depreciating foreign exchange rates.
On Thursday, the three major A-share indices continued to drop, with the Shanghai Composite Index falling by 0.83% to 2,957.57 points at the close. The trading volume in both Shanghai and Shenzhen has been below 600 billion for two consecutive days, with over 4,800 stocks declining. On Wednesday, the offshore renminbi exchange rate fell below 7.31, hitting a new low since November 3 last year. The onshore rate approached 7.2735 during trading, close to the “limit down,” setting a new low in over seven and a half months.
Wang Guochen stated, “The real estate, bond, stock, and currency markets are all visibly depreciating. The only sector that appears to withstand the downturn is the banking sector, as seen in the CCP’s prohibition on individuals withdrawing funds and seemingly preventing any signs of a large-scale financial crisis.”
“Consequently, the government will increasingly control the economy and expand state-owned enterprises to boost employment, moving towards a public ownership economy reminiscent of the Mao era.”
Recently, a report from the China Index Research Institute revealed that in June 2024, the average price of second-hand housing in a hundred cities was 14,762 yuan per square meter, a 0.73% decrease from the previous month, expanding the decline by 0.03 percentage points compared to May, marking 26 consecutive months of monthly declines with a year-on-year drop of 6.25%.
Data released by the Chinese National Bureau of Statistics on June 17 showed that the selling prices of commodity housing and second-hand housing in 70 large and medium-sized cities have all declined.
Wang Guochen analyzed that as Chinese housing prices have been falling for nearly two years, further declines would trigger various problems affecting the real estate and financial industries, as well as the overall economy.
“For individual buyers, the first problem is whether those who purchased homes with loans will be required to repay their collateral, as many used their homes as collateral for mortgages. With property values halved, their collateral is likewise devalued, potentially necessitating additional collateral.”
“Secondly, assuming someone initially purchased a house for 10 million yuan, which now halved to 5 million, but they still owe a mortgage of 10 million yuan. The aftermath of this scenario will lead to considerable price confusion and economic disorder.”
Furthermore, “as it’s becoming increasingly challenging to sell second-hand homes, those struggling to maintain their properties may face the fate of foreclosure.”
“For the real estate sector, with ongoing declines in property prices, builders are unable to sell their properties, witnessing continued closures. Previously, hundreds of companies closed each year, but now these listed major developers are following suit in rapid succession.”
He emphasized the impact on the financial industry, noting that as long as the CCP prevents people from withdrawing funds, there won’t be significant issues. Nonetheless, reports of individuals facing difficulties withdrawing or depositing money surface weekly. By keeping people from bank runs, the situation appears less likely to lead to a large-scale financial crisis.
In terms of the economy, he highlighted, “When the real estate market stagnates, the overall economic vitality diminishes, visible in the Purchasing Managers’ Index (PMI) falling below the 50% mark again. In other words, with a sluggish real estate market, the economy continues to idle.”
“In an idle economy, government revenue will dwindle, making it increasingly difficult to address real estate issues, thereby trapping mainland China into a vicious cycle.”