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China’s Housing Crisis Deepens in May:  What Will (and Can) Beijing Do About It (Hint, Probably not Much)?  Plus, the Ongoing Property Slump is Undermining Local Government Finances:

China will soon enter the fourth year of what has seemed to be a never-ending real estate downturn.  This slump began in August of 2021, when the government initiated a regulatory crackdown on developer debt and speculative home purchases to deflate the bubble in the property market.  Home prices are estimated to have fallen 21-30% between their 2021 peak and the start of this year.  The first five months of 2025 has seen no break in this downward trend; indeed, a June 15^th Bloomberg report indicates that the decline in the price of residential real estate accelerated somewhat in May. 

According to data released by the National Bureau of Statistics on June 9^th, new home prices in 70 Chinese cities fell 0.22% in May from April, when they dipped 0.12%.  The May drop in new home prices was the steepest in seven months.  The values of pre-existing homes went down 0.5%, the sharpest fall in eight months.    

Home sales also contracted in May.  Based on calculations from other official data released on June 9^th, Bloomberg estimates that residential sales by value shrank 6.1% from the already low base figure from a year earlier.  The May decline topped the 6% fall residential sales by value during April and was markedly higher than the 0.4% drop that occurred during the first quarter of 2025. 

 

Bloomberg calculates that the decline in real estate investment accelerated in May, contracting 12% year-on-year, which was the sharpest fall since December.  That figure is a little higher than the 10.7%decline in property investment shown in the official Chinese Government data released on June 9^th. 

In a note to investors released during the first week of June and quoted in Bloomberg, Ning Zhang of UBS Group AG declared, “We see China’s property downturn continuing in 2025, but with a smaller decline of property activities than in 2024.”  This forecast is in line with an April UBS survey of 2,500 respondents, which found higher expectations for more property declines.  That outlook, in turn, will certainly discourage would-be buyers from purchasing homes by incentivizing them to wait for prices to drop even more, creating a downward spiral.    

These findings align with a gloomy forecast issued by Goldman Sachs on June 17^th.  The investment bank predicted that the demand for new homes in China is likely to stay substantially below its 2017 peak over the next few years, when it will probably come in at under 5 million units per year.  That figure is one quarter of 2017 demand of 20 million units.  

The dire state of China’s residential property market is underscored by a ground-level anecdote I first heard about on the excellent podcast, “China Update,” which is presented by a Kiwi living in Beijing named “Tony” (the bloke doesn’t give his last name).  He was citing a story that apparently briefly appeared in YiCai, an English-language global version of the well-regarded Chinese publication focused on business and finance, Caixin.  The story claims that Chinese real estate agents, who are under severe pressure to meet stiff quotas from their bosses, have been hiring actors to pose as potential home buyers (the actors are being paid 35-60 RMB per hour [$5-$8]).  This is being done to create the illusion of demand.  Even formerly hot real estate markets, like Shanghai and Shenzhen, have seen a steep fall-off in the number of deals per individual agent.  When I googled this story using the right keywords, a url link came up—here it is, for anyone interested—and when I clicked on it, it took me to YiCai, where a note to the effect, “story does not exist,” appeared in the middle of the screen.  Me thinks that the article did briefly appear online, which why it had a url, only to get quickly scrubbed by Chinese censors.  In any case, I find the anecdote to be entirely plausible and it falls into the category of “You just can’t make this stuff up,” while also illustrating my strong belief that reality is often more interesting than fiction.

On June 13^th, the increasingly stark reality of China’s ongoing housing slump led Premier Li Qiang to pledge state action to make the real estate market “stop declining.”  This announcement is similar to the one that preceded the stimulus package issued back in September 2024 to prop up household consumption and the property sector.  Those measures included reducing mortgage rates on existing homes by 0.5%, lowering of the minimum down payment for second-home buyers, and having the central bank fully fund a 300 billion RMB ($42.52 billion) loan initiative enabling state-owned enterprises to buy unsold homes and convert them into low-cost housing.  Given the limited impact of these earlier actions in moving the needle in a positive direction on both consumption and home buying, the government may well undertake more far-reaching efforts to reinvigorate the housing market.  

The problem facing Beijing is that the difficulties afflicting China’s residential real estate are not merely cyclical in nature.  They are also structural, stemming from China’s adverse demographic trends and severe mismatch between the spatial distribution of home construction and demand for it.              

Starting with the bad demography, between now and 2040, China is expected to undergo a marked contraction in both the numbers and share of the population of people in their 20s, 30s, and 40s, the age brackets who are the biggest home buyers.  Back in 2018, Nicholas Eberstadt, holder of the Henry Wendt Chair in political economy at the American Enterprise Institute Washington, DC, think tank, estimated how the numbers and shares of China’s population of these age groups would shift during the 2020s and 2030s.  He projected that between 2015 and 2040, the number of Chinese aged 15-29 will fall by 75 million, with their share of the population dropping from 1/3 to 1/4.  The number of Chinese aged 30-49 is projected to shrink by over 100 million, declining from 43% to 37% of the population.  At the same time, Eberstadt notes the UN estimates that the share of those 65 or older in China’s population will rise to 22% by 2040 (the current share is around 13%).  As these elderly people age and cease being able to live independently, large numbers will move out of their homes to either live with and receive care from their children or go to senior care facilities.  This will increase the amount housing for sale on the market, even as the pool of potential buyers shrinks.  (It bears noting that since 2018, the population data and demographic picture for China has gotten markedly worse, so the above numbers likely understate the difficulties facing the housing market).

On top of this unfavorable demography, the distribution of housing construction in China does not closely dovetail with the demand for it.  In a September 2022 International MonetaryFund Occasional Paper, Harvard economist Kenneth Rogoff and Yang Yuanchen estimated that the aggregate total housing stock in tier 1-3 Chinese cities rose from 39 billion to 56 billion square meters between 2010-2021.  Tier 1 cities include Beijing, Shanghai, Guangzhou, and Shenzhen, where the demand for housing has always been greatest, due to large in-migration stemming from their economic dynamism and greater job opportunities.  By contrast, Tier 3 metropolises consist of poorer provincial capitals and cities of more limited political and economic significance with large populations.  Rogoff and Yuan found that this category accounted for 78% of the growth in the urban housing stock during the 2010s, despite being home to 66% of Chinese urban residents.  They estimate that between now and 2035, real estate construction in such places will have to shrink by roughly 30%.  This supply-demand imbalance will be exacerbated by the likely outflow of residents moving to higher tier cities in search of better economic prospects.  

Thus, even if the Government mounts a more aggressive housing stimulus, including greatly lowering mortgage rates for first-time home buyers, than the one mounted in September, it is far from certain that it will greatly revive the residential real estate market.  It may do some good in upper tier cities, where home prices had risen by 0.1% for five straight months before dropping in May by 0.2% (that earlier rise has been creditedto the September stimulus, particularly the relaxation of curbs on 2^nd home purchases).  But it will not address the contraction in the share of the population most likely to buy residential property and huge overhang of unoccupied flats in lower tier cities.  In these metropolises, it will take many years to realign the supply of housing with the demand for it, particularly in the face of China’s demography and the out migration of people to upper tier cities to have a better life.  I think that one of my favorite China analysts, Alicia Garcia-Herrera, Chief Economist for Asia Pacific at the French investment bank Natixis, was spot on when she posted some time ago about the Chinese real estate sector, “They’ve (meaning government authorities) tried it all—to be frank, it is just a bloated sector.  It’s too big.”    

All of this will leave large numbers of Chinese households, who have 70% of theirwealth tied up in their homes, feeling less affluent and more reluctant to boost consumption.  China’s property meltdown is estimated to have already destroyed up to $18 trillion ofhousehold wealth, exceeding the losses Americans suffered in the 2008-2009 subprime financial crisis.  The scale of this wealth destruction has certainly played a major role in dampening consumer spending and hindering China’s post-Covid economic recovery.

Besides dragging down household consumption, China’s property slump is upsetting local government finances.  The absence of property taxes in China has left local government heavily dependent on revenue from land sales, or, better put, land use sales.  Calculations by Bloomberg based on Chinese Ministry of Finance data released on June 20^th show that what local governments took in from land use sales dropped 14.6% year-on-year in May.  These receipts amounted to 194.1 RMB ($35 billion), the lowest since May 2015.  The May drop off reversed a 4.3% rise in land use sales in April, which had been the first increase in three months.  Revenue from real estate transaction related fees, including the deed tax paid on property purchases, slid 8.6% year-on-year in May, greatly exceeding the 0.9% fall for April.  

Commenting on the May data on land use sale revenue in Bloomberg, Wang Lisheng, an economist with Goldman Sachs, wrote in a note after the numbers were released, “We maintain our forecast that government land sales revenue may decline further this year by 5 to 10%, and continue to believe property construction and investment have not yet hit bottom.”  This forecast does not bode well for limiting the huge “hidden” local Chinese Government debt, which is tucked away in so-called Local Government Finance Vehicles, and now amounts to $8-11 trillion.

The fall in land use sales has also depressed overall Chinese government revenue.  In a March 2025 paper, Logan Wright of the Rhodium Group notes that the Ministry of Finance failed in 2024 to meet its 3.4% revenue growth target.  Rather than rising tax, receipts dropped 3.3%, with only a 25.4% spike in non-tax revenues staving off an outright decline in fiscal revenue growth.  Wright further notes that adding together China’s three main sources of revenue, taxes, tax revenues, and land use sale proceeds, “China’s aggregate revenues are likely to decline in 2025, even if China meets its full-year growth targets of ‘around 5%.’” 

The negative blowback from the increasingly acute fiscal squeeze on local governments is now being acutely felt by Chinese pensioners.  A recently conducted investigation by China’s National Audit Office uncovered widespread local government theft of pensionfunds across nearly all of the provinces and autonomous regions in the country.  Local officials stole $8.3 billion from pension programs—as is the case with all social welfare functions in China, pensions are administered at the provincial government level—in a desperate effort to cover revenue shortfalls.  Among the close to 3 million people victimized by this theft were close to a half million so-called “disadvantaged people,” which included seniors living in poverty.     

Once again, you just can’t make this stuff up.  On a more serious note, as China’s real estate slump drags on with no early end in sight, its governments will be facing very painful fiscal choices.   

Deflation Update:  Profits of Chinese Industrial Firms Fall in May:

As the old adage about things going from bad to worse goes, “when it rains it pours.”  And so it is with the negative numbers raining down on China’s economy in May.  The latest indicator to fall in the wrong direction are industrialprofits, which dropped 9.1% in May from a year earlier, breaking a two-month rise.  Industrial profits fell 1.1% for the first five months of 2025 from the same period in 2024. 

The statement of the National Bureau of Statistics statistician Yu Weining regarding the cause of this decline is instructive:  “insufficient effective demand, declining prices of industrial products and fluctuations in short-term factors.”  This verdict was echoed by Feng Jianling, chief economist at the Beijing FOST Economic Consulting, “The impact of overcapacity and falling prices on enterprises is still emerging, and efforts need to be made to adjust supply and stabilize demand.”  Indeed!

The threat of a deflationary spiral continues to loom over the Chinese economy.