China’s property market has long been a cornerstone of household wealth, financial stability and economic growth. For global investors, developments in China remain a key reference point for broader macroeconomic and financial trends. During recent Amundi Investment Talks, attention was drawn to China’s slowing growth and structural challenges. One aspect that deserves closer scrutiny, however, is how falling property prices are affecting ordinary homeowners — even in top-tier cities such as Shanghai.
After three years of price corrections, property values in many regions have fallen back to 2018 or even 2016 levels. This reversal is reshaping the financial position of households that bought at the peak of the market and is creating new risks for banks and local economies.
From buyers to sellers in need of credit
Traditionally, Chinese households rely heavily on bank mortgages to purchase property. What is increasingly unusual in the current downturn is that sellers, too, now need financing. As prices decline, many homeowners discover that the proceeds from selling their apartment are no longer sufficient to repay the outstanding mortgage. Those who still want or need to sell often require an additional loan to cover the remaining liabilities.
This problem is most acute for buyers who entered the market during the property boom between 2020 and 2023. Official data show that the average price per square metre of newly built residential property rose by almost 50% between early 2018 and mid-2023. With typical down payments of around 30%, households were forced to take on progressively larger mortgages for the same living space. As prices have since corrected, equity buffers have rapidly eroded.
A weaker economy amplifies the pressure
At the same time, China’s broader economic environment has deteriorated. Salary reductions, job losses and greater income uncertainty have become more common, weakening households’ ability to service debt. Interest rate cuts — from around 6% in 2023 to roughly 4% on existing mortgages — have provided limited relief. For many borrowers, income insecurity and falling asset values outweigh the benefits of lower borrowing costs.
This leaves homeowners with difficult choices. Some continue servicing their mortgages despite knowing that a sale would not cover the remaining debt. Others proceed with a sale, often supported by banks, family members or friends. In large metropolitan areas, the likelihood of financial recovery is generally higher, partly because rental yields remain low — typically around 1% to 2% of purchase prices — making renting a viable alternative. In smaller, so-called low-tier cities, rental yields are slightly higher, but market liquidity is weaker.
How large is the default risk?
The true scale of mortgage stress remains uncertain. A now-deleted report by the Bank of China Research Institute estimated that the share of mortgages no longer serviced due to borrower insolvency could reach 3.7% by 2025, rising to around 5% in some low-tier cities. By contrast, commercial banks officially report non-performing loan (NPL) ratios of no more than 2%.
Regardless of the exact figures, banks appear under pressure to keep defaults off their balance sheets. As a result, enforcement remains cautious, with limited reminders and delayed corrective measures. This has created an unintended side effect: some borrowers are withholding payments even without acute financial hardship. In the worst cases, late payments can lead to blacklisting, restricting access to premium travel or services — penalties that some borrowers appear willing to tolerate.
Banks add to downward price pressure
Another factor weighing on the market is the behaviour of smaller regional banks, particularly in low-tier cities. These institutions are increasingly trying to dispose of properties pledged as collateral. Under banking regulations, such assets must be sold within two years, often at discounts of 20% to 30% to prevailing market prices. This depresses sentiment further, encouraging buyers to delay purchases and forcing sellers to lower asking prices.
The most vulnerable group consists of borrowers who must sell under severe financial pressure and receive significantly less than expected. Because Chinese banks retain full recourse to borrowers’ remaining personal assets, mortgage obligations often persist even after a loss-making sale, with limited refinancing options.
No nationwide personal insolvency framework
In many developed markets, personal bankruptcy laws would allow heavily indebted households to reset their finances. In China, however, there is still no nationwide personal insolvency regime. Pilot programmes exist only in a few cities, such as Shenzhen and Xiamen. This limits the ability of distressed households to make a fresh start.
One mitigating factor remains: in practice, courts rarely enforce evictions when a property is the borrower’s only residence. Even after foreclosure, occupants are often allowed to remain. This reflects the authorities’ ongoing focus on social stability — a theme repeatedly highlighted during Amundi Investment Talks as a defining feature of China’s policy approach.
Implications for investors
China’s property correction is no longer just a developer story. It is increasingly a household balance-sheet issue with potential spillovers to banks, consumption and growth. For international investors, this reinforces the need for caution when assessing exposure to China’s financial system and domestic demand — and for closely monitoring how policymakers balance financial discipline with social stability.
