China's Property Crisis: The Reckoning After Evergrande

On 20th August 2026, Hui Ka Yan, founder of what was once one of the world's largest property developers, Evergrande, was sentenced to life imprisonment following his arrest for financial crimes, drawing attention once more to his company's dramatic collapse and its ripple effects on China's economy.¹ His conviction provides a stark reminder of the scale of China's ongoing property crisis. The collapse of Evergrande is not an isolated incident, but rather a symptom of deeper problems within China's property-led economic growth model.

From State Housing to a Privatised Boom

Before the 1990s, housing in China was centralised and largely provided either through the state or employers. In the 1990s, the government began encouraging households to purchase their own homes, leading to a privatisation of the market.² China's rate of urbanisation was rapid, increasing from 29% to 65% between 1995 and 2021. There was also a demand surge for housing, which meant that real estate development prospered; the cycle continued with more money being borrowed from banks in order to construct more houses.

Governments received more fiscal revenue and infrastructure investments soared.³ Between 2010 and 2019, the real-estate boom in China contributed up to a third of the growth in fixed asset investment and GDP. Chinese real estate developers became the largest in the world, with households investing up to 80% of their wealth into real estate.⁴

The Bubble Begins to Burst

This bred a conviction among investors that housing prices would always go up. However, as the population began to decline and housing became increasingly unaffordable, the property bubble started to burst. The price-to-income ratio in first-tier cities was as high as 26.6, and in second-tier and third-tier cities around 12.⁵ High property prices slowed down urbanisation and began to crowd out lower and middle income households, reducing their disposable income and widening the wealth divide. At the same time, regulators became increasingly concerned about developers' heavy reliance on debt, setting the stage for the financial difficulties that would later spread across the property sector.

Evergrande's Debt-Fuelled Collapse

In 2021, Evergrande's debt-fuelled business model reached a breaking point. The developer had accumulated reported liabilities of over $300 billion, making it one of the world's most indebted property companies.⁴ As property sales weakened and financing became harder to access, Evergrande defaulted on its debt in December 2021.⁶ Its collapse exposed the risks of developers relying heavily on borrowing and continued property sales to finance expansion. In January 2024, a Hong Kong court ordered Evergrande to liquidate after restructuring negotiations with creditors failed.⁷ Although efforts to restructure its debt and sell assets continue, creditors remain uncertain about how much they will recover. Evergrande's collapse became a symbol of China's wider property crisis, demonstrating how falling property demand could turn developers' high debt levels into broader financial instability.

The Three Red Lines and a Deepening Downturn

The People's Bank of China and the Ministry of Housing and Urban-Rural Development introduced the Three Red Lines Policy in August 2020, which aimed to improve the financial health of the real estate sector by reducing developers' leverage and increasing liquidity.⁸ This policy made it much harder for developers to obtain new financing and caused the real estate industry to fall into a liquidity crisis.

The effect on prices has been broad and slow to reverse. China Index Academy figures for June 2026 put secondary-market prices across 100 major cities at an average of 12,639 yuan (about US$1,750) per square metre, down 0.42% on the month, with 88 of the 100 cities falling and only 12 rising. Measured over the year, the declines were steeper in second-tier cities, at 8.21%, than in first-tier cities, at 6.95%. Among the ten largest cities, Nanjing and Wuhan fared worst, each shedding more than a tenth of their value in twelve months.⁹

A Second Front: Local Government Debt

The property downturn has exposed the growing financial problems facing China's local governments. For years, local authorities relied heavily on selling land-use rights to developers for revenue, while local government financing vehicles (LGFVs) borrowed money to fund infrastructure and housing projects. However, the collapse in the property market has more than halved land-sale revenues, which fell from a peak of 8.7 trillion yuan in 2021 to 4.15 trillion yuan in 2025.¹⁰ At the same time, LGFVs have built up debts that the International Monetary Fund put at roughly 46% of GDP at the end of 2023, or around $8 trillion, with private estimates running higher still.¹¹ Many local governments have been left struggling to pay suppliers and public-sector workers on time, limiting Beijing's ability to provide stronger fiscal support to the wider economy.

Successive rounds of regulatory easing and fiscal support have not put a floor under the market, and Beijing's posture has shifted from rescue towards managed retreat. The authorities have declared that the traditional model of "high debt, high leverage, high turnover" has reached its end, and now speak instead of building a "new model of real estate development". Ni Hong, the Minister of Housing and Urban-Rural Development, has written that the sector's future lies in affordable housing, better services and broadly stable prices.¹²

A Drag on the Wider Economy

Property matters to China's economy out of all proportion to its official share of output. On the broadest measure, used by Kenneth Rogoff and Yuanchen Yang, real estate and the activity it drags along behind it has accounted for close to a quarter of GDP.¹³ When prices fall, the damage therefore reaches well beyond developers. Households, for whom a home is the main store of savings, feel poorer and spend less, while developers cut construction and investment in turn.

The scale of that wealth effect is easy to misread. Prices themselves have not collapsed: the Bank for International Settlements index of real Chinese house prices peaked at 113 in 2021 and stood at 85.1 in the first quarter of 2026, a fall of roughly a quarter.⁹ What has gone is the upside. Macquarie estimates that around 85% of the price gains that built household wealth over the preceding decade have been erased since 2021.¹² For anyone who bought near the top, the paper profit that justified the purchase has simply disappeared.

That goes some way to explaining the rest of the picture: cautious consumers, weak confidence among households and businesses alike, declining investment and persistent deflation. Until the housing market finds a floor, the Chinese government will struggle to achieve its stated goal of lifting domestic demand.

Footnotes

1. South China Morning Post, Saga of China Evergrande founder Hui Ka-yan ends with life sentence (opens in a new tab), 20th August 2026.

2. GAM Investments, China housing market downturn and its impact (opens in a new tab), 13th January 2026.

3. China Daily, Property sector critical to growth (opens in a new tab), 29th January 2024.

4. Bruegel, The boom, bust and future of China's real estate sector (opens in a new tab), 18th January 2023. ²

5. CKGSB Knowledge, Series: China's real estate problem 1. The "three red lines" (opens in a new tab), 5th July 2022.

6. Congressional Research Service, Evergrande Group and China's Debt Challenges (opens in a new tab), 12th May 2025.

7. South China Morning Post, High Court orders Evergrande to wind up in Hong Kong's first liquidation (opens in a new tab), 29th January 2024.

8. EAC Consulting, Three red lines policy – regulating China's real estate developers (opens in a new tab), 2021.

9. Asia Times, China's housing market free-falls as buyers wait for floor prices (opens in a new tab), 3rd July 2026. ²

10. Yicai Global, Chinese Local Gov'ts Log Double-Digit Drop in Income From Land Sales for Fourth Straight Year in 2025 (opens in a new tab), 2nd February 2026.

11. International Monetary Fund, People’s Republic Of China Financial Sector Assessment PROGRAM (opens in a new tab), IMF Country Report No. 25/100, April 2025.

12. Atlantic Council, China's property slump deepens and threatens more than the housing sector (opens in a new tab), 28th January 2026,; Qiushi, 改善和稳定房地产市场预期 (opens in a new tab), 1st January 2026. ²

13. International Monetary Fund, China's Real Estate Challenge (opens in a new tab), December 2024.