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Economic Insight
28.10.2025
Real estate is a key pillar of China’s economy, accounting for a big share of GDP and household wealth. Prior excessive growth across both the residential and commercial segments, speculation, high indebtedness, and property being the key store of household wealth in China were the main factors that led to the crisis in the sector. Since the onset of the crisis in 2020-2021, authorities undertook a wide array of initiatives that provided help but could not arrest the market’s decline; growth in house prices, in real estate investment, and in sales have been in the red for more than three years. The steady drop in prices has led to a negative “wealth effect”, putting pressure on domestic consumption. The bottom is not in sight yet, but once it is, in 2027, 2028 or beyond, economic growth will get a boost and a much-needed rebalancing. This will help China continue recording resilient GDP growth, which is seen at a relatively solid 4.2% in 2026 and 2027, despite the ongoing property market drag.
Real estate is a key pillar of China’s economy, accounting for a big share of household wealth
Boosting consumption and technological innovation remain central to China’s long-term policy priorities, but stabilizing the real estate sector continues to be important amid persistent declines in house prices and sales. Although the sector’s share of GDP has declined from its peak, real estate continues to play a pivotal role in China’s economic framework. Historically, real estate activities have contributed around 20% of GDP as per the IMF. Therefore, real estate stabilization is a strategic necessity to support broader growth ambitions and mitigate downside risks from weak domestic demand and external headwinds.
Beyond its share of the economy, real estate is deeply embedded in China’s financial and social fabric; around 70% of household wealth is tied to the property market, according to rating agency Moody’s, making housing prices a critical driver of consumer confidence and spending. In fact, the plunge in consumer confidence back in 2022 correlates well with the accelerating weakness in the property market at that time. Local governments have traditionally relied heavily on land sales for revenue, which fund infrastructure and social services, creating a strong link between property market health and public investment. Despite the steady decrease in the past few years, land sales still accounted for a big portion of local governments’ revenue in 2024.
Excessive growth, speculation, high indebtedness, and being the key household wealth store led to the crisis
China’s property crisis is the result of deep structural imbalances and policy shifts that disrupted a decades-long growth model. For years, real estate boosted economic activity and served as the primary channel for household wealth accumulation. With few alternative investment options, households funneled savings into housing, pushing prices far beyond income levels and fueling speculative buying. Developers capitalized on this boom with aggressive borrowing, often using pre-sales to fund expansion, while local governments became heavily dependent on land sales for revenue, creating a mutually reinforcing cycle of leverage and growth. This model began to unravel in 2020 when Beijing introduced the “Three Red Lines” policy, imposing strict leverage caps on developers and curbing bank lending to the sector. The sudden liquidity squeeze exposed the fragility of highly-indebted firms, culminating in the collapse of Evergrande (once China's largest developer by sales) in 2021 with contagion spreading to other major developers, triggering widespread defaults. As housing transactions plunged, developers struggled to complete projects, sparking mortgage boycotts and amplifying financial stress. Hence, after years of relentless buyer demand, the market came to a near standstill. Furthermore, the economic shock from prolonged Covid lockdowns, and rising layoffs, reinforced a culture of caution, further eroding purchasing activity. The crisis has since evolved into a systemic challenge, forcing policymakers to balance short-term stabilization needs with long-term structural reforms.
A wide array of support initiatives provided some help but could not arrest the decline in the property market
Since the onset of the crisis in 2020-2021, the authorities undertook a wide array of initiatives to arrest the market’s decline. This included lowering benchmark interest rates, cutting rates on existing mortgages, reducing minimum down-payment ratios, increasing funding for the purchase of unsold completed properties and for qualified real estate projects under the “white-list” mechanism, among other measures. The last major initiative to support the property market was in September 2024 when interest rates on existing mortgage loans were lowered by around 50 bps, and the minimum down payment for the purchase of a second home was reduced from 25% to 15%. In addition, funding support for local state-owned enterprises purchasing unsold housing stock was raised from 60% to 100%. Moreover, the People's Bank of China (PBoC) cut the reserve requirement ratio (RRR) by 50 bps, injecting approximately 1 trillion yuan in liquidity, alongside 20-30 bps reductions in several of their policy rates. Following that, in mid-October 2024, the government expanded the “white-list” mechanism.
Growth in house prices, in real estate investment, and in sales have been in the red for more than three years
Despite the multiple support measures undertaken since the onset of the crisis, the authorities couldn’t yet arrest the overall decline in the market. The housing market remains very fragile, with even a temporary recovery hinging on continued government support. New house prices continued to decline on a y/y basis, but the pace of decrease has gradually eased over the past 11 months, with the drop in September (2.2% y/y), the lowest since March 2024. Similarly, the y/y decrease in existing house prices has softened for 12 consecutive months with the fall in September (4.9%) the smallest since January 2024. While this steady softening in y/y decreases is undoubtedly encouraging, we note that m/m price changes remain mostly in the red, indicating ongoing stress and that the bottom has not been reached yet. Moreover, both real estate sales and investment continue to drop with total sales down by 8% y/y in 9M2025 and investment down 14% in the same period, both indicating that the bottom is not in sight yet. The ongoing decrease in house prices has created a negative loop, discouraging incremental demand while structural challenges, such as high inventory levels, affordability constraints, and a shrinking population continue to impact the outlook.
The bottom is not in sight yet, but once it is, economic growth will get a boost and a much-needed rebalancing
Despite the property market remaining a big drag, GDP managed to increase by a decent 5.2% y/y in 9M2025. Hence, the government’s target of “around 5%” growth in 2025 is well within reach. And despite the property market drag continuing, at least for another year, if not more, GDP growth forecasts remain relatively resilient at 4.2% in 2026 and 2027, as per the IMF. The flipside is that whenever the property market bottoms out, be that in 2027 or 2028 or even later than that, the drag on GDP will, at a minimum, vanish. This, all else equal, means stronger overall GDP growth, setting the stage for still resilient growth in 2028 and 2029. Obviously, whenever that bottoming out process is firmly ingrained, household and business confidence levels will improve, giving a boost to both domestic consumption and investment. This will help the much-needed rebalancing of China’s growth away from the current export-led model, towards a domestic consumption-driven one.