Falling Prices and 70 Million Empty Apartments: What's Happening to China's Real Estate Market?

In January 2025, prices for new homes in China remained unchanged from the previous month, though they showed a decline compared to the previous year. This confirms that the crisis in the local real estate market, which began in 2021, has not yet subsided, although the recovery process has already started.

Background

The troubles are widely traced back to the debt crisis of major Chinese developers, such as Evergrande, whose debt peaked at over $300 billion. These debts kept growing, not because the developers were operating at a loss, but due to the peculiarities of their economic model. For instance, they sold apartments before construction even began, requiring buyers to pay an initial deposit of 30–50% of the property’s value. The managing companies used these funds not only to complete the construction of that specific project but also to finance new ones.

Since buyers typically covered the remaining amount with a mortgage, the companies often lacked sufficient internal funds to meet all their needs. As a result, they turned to banks for loans, issued bonds, or even resorted to less-than-legal investments (shadow loans).

In other words, instead of using the money from prospective homeowners to finish building their homes, developers diverted it to other projects, business expansion, and even non-core expenses—like Evergrande’s purchase of a football club. This scheme resembled a financial pyramid, and like any pyramid, it worked as long as the market was growing and attracting new clients.

The Golden Era of Chinese Developers

In the 2000s and 2010s, China experienced rapid urbanization. Amid economic growth, people from villages and small towns flocked to major cities in search of higher salaries. This naturally drove up demand for housing, prompting developers to capture as much market share as possible by purchasing land at inflated prices.

These land plots were used not only for construction but also for speculation, with companies expecting to sell them at a higher price in the near future.

Initially, banks were satisfied with this arrangement: during the boom, they were investing in a stable business as property prices rose by 5–7% annually. However, starting at the end of 2020, the situation shifted, and demand for housing began to weaken. Alongside this, new home prices stagnated, while secondary market prices started falling by 6–9% per year.

The growing debts became a problem not just for the developers but also for the banks themselves. As American oil magnate J. Paul Getty famously said, “If you owe the bank $100, that’s your problem; but if you owe $100 million, it’s the bank’s problem.”
In this case, the country’s banking system suffered because 40% of all loans were tied to the real estate sector, with 10–15% of them being loans to developers.

The share of non-performing loans (NPLs)—loans that borrowers cannot or will not repay, leaving banks uncertain about recovering the full amount—began to rise. In 2020, the NPL ratio stood at around 1.96% of all loans in the country, and something had to be done about it.

China’s Government Response

The government introduced the “three red lines” policy, which restricted annual debt increases for developers failing to meet the following criteria:

• A debt-to-assets ratio of no more than 70%.
• Net debt not exceeding equity.
• Cash reserves sufficient to cover short-term liabilities.

As a result, most major companies failed to meet these standards. For instance, 70% of Evergrande’s debts were short-term, and it couldn’t refinance them. Liquidity plummeted for companies accustomed to relying on a constant influx of loans and credit, leaving them unable to complete ongoing projects. This sparked protests from buyers, who, in 2022, boycotted mortgage payments for unfinished homes in response.

Consequently, at the direction of the Chinese government, banks allocated 4 trillion yuan ($560 billion) in 2024 to complete stalled projects. The central bank reduced the key lending rate (LPR) from 4.2% to 3.85%, and the minimum down payment for first-home mortgages dropped from 20–30% to 15%.

Furthermore, local authorities spent 300 billion yuan ($42 billion) to purchase unsold housing and transfer it to social housing funds, while also allowing companies to lower prices without needing approval from local regulators.

Current Situation

According to the National Bureau of Statistics, sales of new homes in 2024 dropped by 18% compared to 2023. The market has accumulated 70 million vacant apartments and houses—an amount that, even if construction halted entirely and sales remained at the current level of 10 million units per year, would last for seven years.

As previously mentioned, new home prices in January 2025 remained unchanged month-on-month but fell by 5% compared to January 2024, offering a faint hint of market stabilization. The secondary market saw steeper declines: prices dropped by 5.6% in major cities (Beijing, Shanghai), 6% in second-tier cities (e.g., Chengdu), and up to 8.2% in third-tier cities (smaller locales). In some regions, secondary housing prices have plummeted by 30% from their 2021 peak.

Two-thirds of small and medium-sized developers have either gone bankrupt or are teetering on the edge. Major players report a 40% drop in annual sales volume. Overall, the stock of unsold housing in 2024 grew to 391 million square meters (+16.2% year-on-year). Assuming an average apartment size of 110 square meters, this equates to roughly 3.5 million vacant units. In cities like Kunming, maintaining these properties is unprofitable, leading local authorities to demolish 15 residential towers in 2023.

Demand has not returned to previous levels, as consumers have lost trust in the market, fearing they’ll end up with unfinished homes and still have to repay loans for them. As of early 2025, over 1.5 million pre-paid apartments remain incomplete. The lack of guaranteed sales has also led to a reduction in overall construction activity, with the number of new projects falling by 23–30% in 2024, according to available data.

Nevertheless, there are signs of a slow market recovery, though Goldman Sachs analysts, in their January 2025 report, argue that the current price stagnation is merely a temporary respite, and a full recovery will require reforming the developers’ financing system.