China’s Real Estate Crisis Deepens Under Pressure From Trade War

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May 30, 2025 - 10:17 Updated: May 30, 2025 - 09:55
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China’s Real Estate Crisis Deepens Under Pressure From Trade War
Commentary

In a real estate market already plagued by oversupply, the U.S.–China trade war is forcing the Chinese Communist Party (CCP) to keep housing prices artificially high to avoid a banking crisis.

The structural issues in China’s housing market have been known for years. Developers are sitting on massive debt, and many face a risk of default so large that it could crash the banking system.

The trade war is now making the problem worse. Under President Donald Trump’s second term, the United States has reinstated and expanded tariffs on Chinese goods, targeting key sectors such as electric vehicles, semiconductors, and batteries. With exports under pressure, real estate is one of the few domestic industries the CCP can still rely on for economic activity. But the sector is already weakening, with sales, construction starts, and investment all in decline.

The incomplete recovery from the COVID-19 lockdowns, followed by the current trade war, has slowed the Chinese economy, threatening jobs and livelihoods. As a result, consumer confidence is low and consumption is flat, making people reticent about spending money, particularly on new homes.

Sales of existing homes are flat, and the number of unsold units has hit a new record. Housing starts are down by more than 24 percent year on year, according to Global Property Guide, and completions are also falling. To clear the market and sell off all of the empty homes, prices would have to come down.

While exact figures vary, some analysts estimate that property prices may need to fall by 20 percent to 30 percent to bring supply and demand back into balance. Goldman Sachs estimated that it would cost 7.7 trillion yuan ($1.07 trillion) to purchase enough apartments to return China’s inventory of empty homes to 2018 levels, assuming a 50 percent discount on current market prices.

Allowing prices to drop by this much would be problematic because about 70 percent of Chinese household wealth is tied up in property. When prices fall, people feel poorer and stop spending. Furthermore, it could trigger a banking crisis.

As of the end of 2024, loans to property developers made up 6.2 percent of total bank lending, while residential mortgages accounted for 17.3 percent, according to S&P Global. Combined, real estate-related loans represented nearly 23.5 percent of all bank credit in China. This high exposure makes the entire financial system vulnerable to a housing collapse.

If property prices fall further, the value of collateral backing bank loans will drop, raising the risk of developer defaults and triggering losses across the banking sector. China’s non-performing loan (NPL) ratio for property development is expected to reach 6.4 percent this year.

Across all industries, the broader non-performing asset (NPA) ratio, which includes NPLs and special mention loans, is projected to peak at 5.9 percent next year, well above the official NPL figure of 1.3 percent reported by state banks. In contrast, U.S. banks hold NPL ratios around 1.6 percent. Trump’s renewed tariffs are expected to further increase both non-performing and special mention loans in Chinese banks.
In addition to the damage that would be done to hundreds of millions of middle-class Chinese whose life savings are tied up in real estate, and the risk of widespread instability in the banking sector, a property price crash would also severely impact local governments. Local governments depend heavily on land sales to developers as a primary source of revenue. In some years, land sales have accounted for as much as 50 percent of their income, according to some China finance experts. When property values fall, land becomes harder to sell, and the price per square meter drops, leading to immediate budget shortfalls.

This is especially dangerous given the size of the debt they are sitting on. Much of it is hidden off the official books, held through local government financing vehicles (LGFVs), which borrow money for infrastructure and development projects using land as collateral or by pledging future land-sale revenue.

Estimates put China’s local government debt, including LGFVs, between $8 trillion and $10 trillion. As the real estate market slows and land sales decline, these debts become harder to service or roll over, increasing the risk of default and pushing some cities to the edge of a financial crisis.

To avert the catastrophic chain reaction a housing collapse would set off, the CCP needs to keep prices high. Beijing has implemented a series of interventions aimed at supporting the property market. The People’s Bank of China has cut interest rates to reduce borrowing costs for homebuyers.

Down payment requirements have been lowered to encourage purchases, and a “white list” program has been introduced to provide targeted funding to developers so they can complete stalled housing projects. These measures reflect the CCP’s effort to prevent a broader collapse and maintain control over a sector that is critical to both China’s economy and its social stability.

Meanwhile, houses stand empty, and prices, already too high, are being propped up by the CCP. This is creating further negative consequences for society and the long-term health of the economy. The high cost of housing has made homeownership increasingly unattainable for young Chinese. As of 2025, China’s housing price-to-income ratio stands at 28.5, meaning average home prices are 28.5 times the average annual income.
Since homeownership is often viewed as a prerequisite for marriage in China, many young people are putting off starting families. This trend is accelerating the country’s population decline and aging crisis, as fewer babies are born while the number of retirees rises and the working-age population shrinks.

Beijing’s efforts to prop up its housing market may stave off immediate collapse, but they come at a long-term cost. By prioritizing artificially high property prices and maintaining central control over the market, the CCP risks deepening financial vulnerabilities and accelerating China’s demographic decline. And ultimately, no matter what steps Beijing takes to stabilize the housing market, the trade war will continue to chip away at the economy until Chinese leader Xi Jinping reaches an agreement with President Trump.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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