China’s Property Crisis,” the “Thousand Year Crash,” By James Reed and Paul Walker

The Chinese property market, once a cornerstone of the nation's economic miracle, is now mired in a structural crisis described by some as a "thousand-year crash." This unprecedented downturn, driven by a combination of overbuilding, demographic shifts, and policy missteps, has left millions of homes unsold, developers drowning in debt, and prices in a relentless decline. Drawing on insights from David Llewellyn-Smith's analysis, Goldman Sachs reports, and other available sources, this post outlines the precarious state of China's property market and its far-reaching implications for the domestic and global economy.

The scale of the crisis is staggering. Goldman Sachs estimates that China's unsold housing inventory, if fully built, would be worth RMB 93 trillion ($13 trillion), dwarfing the projected RMB 9 trillion in property sales for 2024. This glut, equivalent to 60 million unsold apartments or ten times Manhattan's office space, represents over two years of demand at current rates. New construction has plummeted, with starts down 75% from their 2017 peak of 20 million units, while sales have halved, indicating a market far from equilibrium. Llewellyn-Smith highlights that urban housing demand is projected to stagnate at under 5 million units annually, a 75% drop from 2017, exacerbated by negative investment demand as owners sell vacant properties and reduced demolitions following earlier redevelopment programs. The secondary market, flooded with unsold units, shows no signs of stabilising, with prices falling 8.57% year-on-year in Q4 2024 and new home prices dropping 0.22% month-on-month in May 2025.

The roots of this collapse lie in a decades-long boom fuelled by state encouragement, low interest rates, and cultural imperatives. Since the 1998 deregulation of property sales, real estate became China's preferred investment, with homeownership reaching 93%, the highest globally. Rapid urbanisation, a growing population, and limited alternative savings options drove prices skyward, particularly in Tier-1 cities like Beijing and Shanghai, where prices quadrupled from 2003 to 2013 despite incomes lagging behind. Developers, emboldened by easy credit, overbuilt, often pre-selling units to fund construction. However, Beijing's 2020 "three red lines" policy, aimed at curbing developer leverage, triggered a liquidity crisis, with giants like Evergrande and Country Garden defaulting on billions in debt. Combined with a shrinking population, expected to reduce housing demand by 0.5 million units annually in the 2020s, and slowing urbanisation, the market's structural flaws were exposed.

Government interventions have been substantial but insufficient. Since 2021, Beijing has injected over RMB 8 trillion in stimulus, including RMB 300 billion for state-owned enterprises to buy unsold homes and RMB 4 trillion to complete stalled projects. Measures like lower down payments, reduced mortgage rates, and urban renewal programs aim to boost demand and clear inventory. Yet, execution has faltered, with only 4-6% of completed housing stock addressed by the relending facility. Local governments, burdened with $9 trillion in debt, struggle to finance purchases, and municipal financing vehicles are barred from buying inventory, limiting impact. Goldman Sachs estimates that $2.1 trillion is needed to restore inventory to 2018 levels, far exceeding current commitments.

The domestic implications are severe. Real estate, once contributing 20-30% to GDP, now drags growth, shaving 0.5-0.7 percentage points off 2024's projected 4.5% GDP growth. Falling prices, down 25% from 2021 peaks in the secondary market, erode household wealth, as property accounts for 43% of household assets. Consumer confidence is battered, with 23.2% of Chinese expecting further price declines in Q3 2024, deterring buyers. Youth unemployment, officially at 7.2% for ages 25-29 but likely higher, and a collapsing birth rate signal long-term demand weakness. Local governments, reliant on land sales for revenue, face fiscal crises, with tax losses exacerbating their debt burdens. Deflationary pressures, evidenced by negative CPI and PPI trends, risk a liquidity trap, further stifling investment and consumption.

Globally, the crisis reverberates through commodity markets and trade. China's reduced construction volume has slashed steel output, weakening iron ore prices as upstream supply chains falter. This impacts resource exporters like Australia and Brazil, who face declining demand for raw materials. The property slump, coupled with weak export demand due to global slowdowns, threatens China's economic stability, potentially intensifying trade tensions as Beijing leans on manufacturing exports to offset domestic weakness. A wave of developer bankruptcies could destabilise China's financial system, particularly shadow banks, with spillover risks to global markets, though domestic debt structures limit systemic default risks.

The crisis draws parallels to Japan's 1990s property bust, where demographic decline and deflation led to decades of stagnation. Unlike Japan, China's high homeownership and state-controlled banking system may cushion systemic fallout, but structural challenges, population decline, overbuilt inventory, and eroded confidence, suggest a prolonged downturn. Goldman Sachs predicts price stabilisation by late 2025 with sufficient stimulus, but analysts like S&P foresee subdued sales through 2026, with annual sales potentially dropping to RMB 8 trillion, half the 2021 peak. Llewellyn-Smith's "thousand-year crash" underscores the permanence of this shift: the era of real estate as China's growth engine is over.

In conclusion, China's property market teeters on the edge of a structural abyss. Massive unsold inventory, collapsing demand, and ineffective stimulus paint a bleak picture, with no quick recovery in sight. Domestically, the crisis threatens economic growth, household wealth, and social stability, while globally, it dampens commodity markets and heightens geopolitical risks. Beijing's challenge is to navigate this bust without triggering a broader financial crisis, but the scale of the problem suggests a long, painful adjustment ahead.

https://www.macrobusiness.com.au/2025/06/chinas-thousand-year-property-crash/