The slowdown in China’s real estate market has been a key factor putting pressure on the country’s GDP growth. In this article, Jian Shi Cortesi, Investment Director of Asia/China Equity at GAM Investments, assesses how the property market is influencing China’s equity performance.
13 January 2026
What caused the housing boom from 1990s - 2020?
It began with the fundamental policy shift of housing privatisation in the 1990s, which spurred massive construction. On the demand side, two powerful engines took over: unprecedented urbanisation, which drew millions into cities, and a rapid rise in household salaries. The housing construction boom contributed to the GDP growth. The result of the all the above factors was a strong property market that lasted for more than 20 years.
What caused the property slowdown?
By late 2010s, more and more home buyers started to complain about affordability, and the government became concerned about a property bubble.
As a result, in 2020 and 2021, some cities in China tightened home purchase restrictions in an attempt to cool off the housing market. At the same time, the government instructed the banks to tighten lending criteria to highly-leveraged developers. The combination of these measures led to liquidity issues for some high-risk developers, some of which have defaulted on their debt.
Between 2010 and 2020, property prices in China’s top 70 cities rose nearly 60%.1 Since 2021, housing prices have been falling.
Chart 1: China’s new home prices across 70 cities
Source: National Bureau of Statistics (NBS) of China, as at October 2025.
Home buyers have become cautious about the property price outlook and are less eager to purchase. In 2025, housing prices are still declining on a year-over-year (YoY) basis.
Chart 2: China 70 cities newly built home prices YoY change (%)
Source: NBS, as at October 2025.
Which parties have been hardest hit in the Chinese property market downturn?
Of all the participants in the property sector, highly leveraged developers have been the hardest hit. After years of aggressive expansion fuelled by easy credit, they found themselves acutely vulnerable when market sentiment shifted and financing tightened. This perfect storm of falling sales and restricted cash flow has forced a significant number of these overextended firms into defaulting on their massive debts, triggering a severe crisis of confidence within the entire industry.
These developers often had trouble getting bank loans, so they aggressively tapped into the bond market, particularly by issuing US dollar-denominated debt with yields as high as 10%. Global bondholders, attracted by these lucrative returns, ended up with significant losses from the defaults.
Are we seeing high risks for mortgages?
No. The proportion of mortgage-related non-performing loans in China's banking sector has increased slightly but remains below 1% at major Chinese banks.2,3 We consider the risk of defaults on mortgage loans to be contained. Mortgage underwriting in China had been relatively conservative. Learning from Western financial crises, Chinese policymakers adopted much more stringent rules on down payments, typically requiring 30% or more.4 Although China lowered the minimum mortgage down payment ratios in May 2024, local authorities retain the flexibility to set city-specific requirements, which are often higher in major cities. For example, Shanghai previously set the downpayment ratio at 30% for first home purchases and 40-50% for second homes. Even after the new rules took effect, the minimum down payment remains at 20% for first homes and 30-35% for second homes.5
On that basis, our team believes Chinese properties benefit from a substantial home equity buffer - the amount of equity homeowners have in their properties, which acts as a cushion against declines in property values. There is no subprime mortgage lending in China, and Chinese households are not overly leveraged. These factors typically provide a substantial cushion for outstanding mortgages.
Why is China's banking system stable despite the severe property downturn?
While China's property crisis has severely impacted developers and shaken confidence, it has not led to bank failures. First, conservative lending practices and stringent collateral requirements ensured that most real estate loans were backed by substantial underlying assets, insulating banks from the full brunt of defaults. Second, banks have maintained ample loan-loss reserves, as mandated by regulators, providing additional protection against defaults.
What measures has the government rolled out to support the property market?
Since 2022, the Chinese government has implemented a comprehensive suite of measures to stabilise and support the property market.
- Easing mortgage requirements: Mortgage interest rates have been lowered to make housing more affordable for first-time buyers and families seeking to upgrade their living conditions.
- Optimising purchase restrictions: Many cities have relaxed or lifted home-purchase restrictions, while maintaining measures to curb speculation.
- Supporting developer financing: Encouraging banks to provide reasonable financing support to qualified real estate developers.
- Promoting urban renewal and affordable housing: Accelerating urban renovation projects and increasing the supply of government-subsidised housing.
What is our expectation on China property for the next five years?
Given the above factors, we see a very low probability of the property slowdown leading to systematic risks in China’s financial system. However, we expect a gradual bottoming-out process for property prices rather than a sharp rebound.
The construction boom is likely behind us. According to the National Bureau of Statistics (NBS) of China, 814.5 million square metres of new housing were sold nationwide in 2024, representing a 14.1% YoY decline.6 Fitch Ratings forecasts annual new housing demand to average around 800 million square metres over 2024-20407, down from 1.6 billion square metres in 20218. This structural shift will continue to weigh on GDP growth.
On the positive side, mortgage payment burdens have to a certain extent constrained discretionary spending. If mortgage payments take up a smaller portion of household income, this could free up spending in other areas, supporting broader consumption growth.
What is the impact of the property slowdown on China’s GDP growth?
The property downturn in China is estimated to have reduced annual real GDP growth by about 2 percentage points per annum in 2024 and 2025, according to Goldman Sachs. However, this drag is expected to narrow to about 0.5 percentage points annually over the next few years.9 Real estate development has historically accounted for 20–25% of total fixed-asset investment10, so a decline in new construction and land purchases directly impacts GDP growth. Property construction also drives demand for steel, cement, glass, machinery and other industrial materials. A slowdown depresses industrial output and related manufacturing sectors. Property transactions support financial services (mortgages, insurance), legal services and brokerage activities, all of which have contracted amid the market slump.
What has been the policy response to stimulate economic growth?
China has implemented a multifaceted strategy to counteract the economic drag from the property sector slowdown by pivoting towards technology innovation, high-end manufacturing, green transition, and domestic demand stimulation. These efforts align with the "dual circulation" strategy11 and long-term goals of fostering high-quality, sustainable growth. These policies helped China maintain a 4-5% GDP growth rate.
Chart 3: China GDP YoY Growth (%)
Source: Bloomberg, NBS, as at March 2025.
How has the housing downturn impacted consumers?
The negative wealth effect from property has significantly impacted consumer sentiment in China since 2021. Residential property constitutes a dominant share of household wealth in China, represents 70% of assets for urban households12. Falling housing prices have made people feel poorer. As a result, people choose to spend less and save more.
In the past five years, household deposits in banks have almost doubled.13
Chart 4: Chinese household deposit (USD billion)
Source: GAM, Bloomberg, NBS, data as at December 2024.
How do we expect the housing downturn to impact China’s equity market?
Historically, Chinese investors have focused on three main asset categories: bank savings, property and domestic equities. The housing downturn initially weighed on overall investor sentiment throughout 2022-2023, driving money to the sidelines. Yet the subsequent sharp decline in equity prices, coupled with property's fall from favour and negligible interest rates of 1-2%, set the stage for a sentiment recovery in 2024. Investors are now increasingly turning to domestic equities as a key alternative, and Chinese equities have rebounded strongly since 2024.
This is similar to what we have seen with property downturns in other markets. For example, during the US housing slump between 2007 and 2012, equity markets declined sharply in 2008, bottomed out in 2009, and then rallied in subsequent years.
We believe China is on a similar path, and the trend is already unfolding. As we have emphasised for several years, we view this environment as a rare opportunity for long-term investors like us to build positions in high-quality names at attractive valuations.
Chart 5: MSCI China Index
Source: GAM, Bloomberg, data as at 30 September 2025. Indices cannot be purchased directly.
Past performance is not an indicator of future performance and current or future trends.
Past performance is not an indicator of future performance and current or future trends.
Jian Shi Cortesi manages China and Asia Equity strategies at GAM Investments. Read more about Jian here.