China's huge real estate bubble has burst, but despite a prolonged downturn in the property market, prices have not fallen significantly.
This is partly because many Chinese cities have imposed strict controls on housing prices over the past two years to keep them stable. But now China is beginning to loosen those restrictions, with unpredictable consequences.
Under previous rules in dozens of cities, local governments typically prohibited developers of new homes from offering discounts of 10 to 15 percent or more on unsold listings. In some cities, officials have also set a floor for the sale price of second-hand homes.
In recent weeks, articles have appeared in state media suggesting that it may be time to abandon such policies, and some cities have indeed begun to relax them. On Tuesday, Chengdu, a city in southwest China, lifted price caps on newly leased land for commercial housing projects in central urban areas and abolished government-guided prices for the sale of second-hand homes.
A broader removal of price caps could help developers clear inventories of unsold homes and raise revenue to pay down their huge debts, setting the stage for a possible recovery.



But it could also expose Chinese homeowners to the risk of a sharper fall in home prices, hitting consumer confidence at a time of weak economic growth and potentially destabilizing the financial system.
According to the People's Bank of China, the homeownership rate for urban households in China was about 96 percent as of 2019. For many people, their home is their biggest financial asset.
Yao Wei, chief China economist at Societe Generale, said it would make sense to allow prices to fall further and allow the market to reach a new equilibrium. 'But it's a risky choice, and there's a lot of uncertainty about how things will play out,' Mr. Yao said.
According to the China Index Academy, a property consultancy, the average price of new homes in 100 cities fell 2 per cent in August from a year earlier and was little changed from the same month two years ago. The average price of second-hand homes in 100 cities fell 2.4 per cent from a year earlier.
In the United States, by contrast, home prices fell by nearly 20 percent between 2006 and 2008. During the financial crisis, home prices in markets such as Phoenix, Las Vegas and San Francisco fell more than 30% at one point.
Economists say China's price floor has helped prevent a sharper fall in prices because many buyers and sellers are reluctant to trade when they cannot price a house at its true market value. This has put many properties off the market.
Sales of homes by China's top 100 real estate companies fell 34 per cent in August from a year earlier, continuing a decline since April, according to unofficial data. The pain from slowing property sales rippled through the economy, dampening consumer spending and construction activity.
Policy adjustment is in the pipeline
Initially, the government required developers to obtain listing approval before selling newly built homes, a measure designed to prevent developers from pushing prices too high.
When China's property market fell into a severe downturn in late 2021, the government ordered cities to ensure that the property market continued to develop "steadily and healthily". Local governments in many cities, mostly smaller ones, have responded, in part by prohibiting developers from cutting prices too far below the initial price they registered with the government.
Some cities have set the floor at 10 to 15 per cent below the original price, while others have been vague about the details, forbidding developers from "malicious price cuts" without specifying what constitutes a "malicious" discount.
Recently, the Chinese government has signaled that it could allow cities to relax or remove price controls, while the central government has taken other measures to support the property market, such as cutting interest rates.
China Real Estate News, a newspaper run by the housing ministry, published an editorial on Aug. 20 urging local policy makers to scrap price caps.
"Developers should be given more autonomy to set prices and allowed to help themselves by cutting prices and promoting sales in order to recover funds as soon as possible," the article said. Other articles in state media have made similar references.
Some industry analysts have objected, arguing in other media that lifting the caps is too dangerous.
According to Chinese media reports, Guangzhou this month allowed developers to start selling buildings freely without seeking approval for prices. At the end of last year, Guangzhou also lowered the lower limit of the floating line. Guangzhou is a manufacturing powerhouse in southern China with a population of 15 million.


Residential buildings in Guangzhou in April.

Attempts to reach Guangzhou officials were unsuccessful.
At least a dozen cities have recently relaxed price restrictions in some cases.
The government of a district in Ya 'an, a city of 1.4 million people in western Sichuan province, announced in August that developers would no longer be subject to a maximum discount of 15 per cent when they used the group-buying model to sell homes. Housing authorities in the eastern city of Huangshan also lifted price controls for developers selling at least 10 units at a time.
Developers are eager for a lower price floor. They have hundreds of billions of dollars of debt coming due this year and need revenue.
Chinese developers had more than 313 million square meters of residential space for sale as of August, up 20 percent from a year earlier, according to official data. With an average size of about 90 square metres per home, this equates to about 3.5 million homes.
Risks to the system
Economists say it is hard to say how much prices would fall if the floor were removed more broadly because China has not experienced such a severe property downturn before. But any decline carries risks.
"The worst case scenario is that people continue to sit on the sidelines because they expect prices to go even lower," said Jens Presthus, an executive at consulting firm Global Counsel. "It tends to be a vicious cycle."
Economists are generally optimistic about property-related risks to China's financial system, in part because homebuyers tend to make large down payments. This gives them an extra cushion when house prices fall. This is not the case in the US, where a wave of mortgage defaults hit the banking sector during the financial crisis.
In a report published in September, ANZ bank noted that the situation in China could change if prices fall sharply further, triggering fire sales and sending the market into a downward spiral.
A 30 per cent fall in Chinese house prices, similar to declines in Tokyo and Hong Kong during past recessions, would leave about 12 per cent of China's $5.3tn total mortgage debt, or about $640bn, in negative equity, meaning the properties would be worth less than the mortgages owed, ANZ said.
If house prices fell by half, that would happen to about 51 percent of mortgages.
In the United States, nearly one-third of homeowners with mortgages fell into negative equity after the financial crisis, according to Zillow.


Residential buildings in Guangzhou in April.

In China, negative equity could catch households and policymakers off guard, ANZ warned. The resulting snowball effect could create a black Swan event, the bank said.
Whether a bigger drop in prices would prompt more people to buy homes is unclear.
Meng Meng, 32, who works in a luggage factory in Guangzhou, longs to own his own home after living in the city for more than a decade.
But he says he can only afford a home if prices drop significantly. He now earns 20% less than he did in 2019, before the pandemic. The number of workers employed at his luggage factory has shrunk to a few dozen from about 100 a year ago.
Who, he asks, has a lot of cash after the pandemic?