Real estate once drove China’s economic growth. Now it’s holding it back.

China has a glut of tens of millions of unoccupied housing units, many unfinished and unsold. An inescapable part of the landscape, seen from roads or trains, are compounds of hulking, empty high-rise buildings. Many of these “ghost cities,” as they’re often called, have no lights and a see-through quality due to their unfinished, open windows.

The country’s three-year-old housing market collapse has dealt a devastating blow to the wealth and confidence of Chinese households, and continues to be a huge damper on growth in the world’s second-largest economy.

But that could be about to change. Beijing has recently signaled it is prepared to take bolder steps to stabilize the housing market and boost overall economic growth. Late last month, the government announced plans to cut mortgage rates and lower home down payments – leading to an early October jump in new home sales in Beijing, Guangzhou, Shenzhen, and Shanghai.

And for the first time, China’s top leaders stressed they must “stop the decline and return stability” to the real estate market, according to a statement following the Sept. 26 meeting of the Communist Party’s ruling Politburo. Last week, the finance minister pledged to shore up big banks and local governments with fresh funds, while a top economic planner projected the country will meet its growth target of around 5% this year.

Experts say it’s not clear whether Beijing will unleash the massive monetary and fiscal stimulus needed to rebuild confidence in the economy – any such plan would require approval by the legislature’s standing committee in coming weeks. But many agree that the property market holds the key to a meaningful recovery.

“[Property] is definitely the biggest drag on the economy, not just this year but over the past three years,” says Larry Hu, chief China economist and managing director at Macquarie Group in Hong Kong.

“The current property downturn easily could drag China’s GDP growth [down] by two percentage points,” he says. “But if we have property stabilized, then the Chinese economy could easily grow 5 or 6%. That’s a huge difference.”

Risky investments

For two decades until 2021, China’s property market surged to become a powerhouse of the country’s economy, making up a quarter of gross domestic product, and accounting for some 70% of household wealth. Construction boomed and many families bought additional properties as investments.

But Beijing’s concerns over the highly indebted property sector led it to impose a regulatory crackdown in August 2020 that restricted new borrowing by developers. This triggered a downward spiral as developers were unable to complete housing and began defaulting on their debt. First to default, in late 2021, was the massive China Evergrande Group, which had liabilities of more than $300 billion and has since been ordered to liquidate.

The bankruptcy of developers dealt a major blow to household confidence in part because of China’s unique “presale” system for financing, constructing, and delivering new housing. Some 80 to 90% of new housing in China is presold, meaning people buy a home before it’s ready to move into, and start paying the mortgage before they have physical possession of the property.

Yet buyers have no way to enforce contracts if developers fail to deliver the housing on time, or at all. “All the risk is borne by the household,” says Andrew Batson, China research director for Gavekal, a Hong Kong-based financial firm.

He says the defaulting of the China Evergrande Group taught everyone in China that the system is no longer reliable. “You could hand over your life savings to a developer and receive nothing. That is a pretty big risk.”

Huang Yuxia, a migrant worker from Hebei province, mustered her family’s savings to buy an apartment for her son, who was engaged to be married. But the apartment, promised for completion in 2021, was never finished. In China, men are traditionally expected to provide a home prior to marriage, and her son’s engagement broke off.

“We didn’t get the house, so he had no place to go,” Ms. Huang says.

Spooked consumers have shunned the market. Home sales measured by floor space have fallen by about half from 2021, and prices have declined to the level of six or seven years ago. This is despite government efforts to encourage demand, including a plan announced in May for banks to lend up to $70 billion to local enterprises to buy up unsold housing – an effort that has so far faltered.

“Homebuyers … are worried prices will keep falling,” says Yin Bolin, a senior broker at Deyou real estate in Chengdu.

Hope and uncertainty

Still, the promise of lower interest and down payments, as well as recent moves by dozens of China’s cities to lift restrictions on homebuying, are generating some new demand.

With her handbag on one arm and her college-age daughter on the other, Ma Qin steps out of a real estate office onto a leafy street in Chengdu, capital of China’s Sichuan province, pleased with her home purchase deal.

“Before, we couldn’t buy houses here in Chengdu. I can now,” says Ms. Ma, who is buying an apartment for her daughter, a folk music student at the Sichuan Conservatory of Music in Chengdu. Ms. Ma had previously been disqualified from purchasing a home in Chengdu because she lives in another city.

Sales of new homes ticked up during the weeklong national holiday following China’s Oct. 1 National Day, with transactions increasing 27% in 25 Chinese cities, according to the China Index Academy.

But experts say that without a major stimulus package, the critical task of turning around the property market is unlikely. The government has so far been reluctant to step in and backstop property developers who ran a high-risk business model, but it’s necessary to restore confidence, says Mr. Batson.

“The people paying the price for developers’ bad behavior are not the developers, but the households themselves – and in fact every participant in the Chinese economy, which remains quite depressed,” he says.

Indeed, many Chinese and analysts alike are watching and waiting to see whether the government backs up its words with actions.

Passersby check out listings in the window of a Lianjia real estate office in Chengdu; many of these would-be house hunters move along, uncertain whether property prices will keep falling. Inside the office, even broker Zheng Renshu says he has no idea when property prices will hit bottom.

“Nobody can tell you that!” he exclaims. “Not even Warren Buffett!”