China’s housing market: A crisis deepened by demographics, but who is it benefitting?

China’s real estate sector, once the backbone of the nation’s economic growth, continues to struggle through a prolonged downturn since late 2020. Even as first-tier cities show signs of stabilisation, much of the country remains mired in oversupply, falling prices, and sagging demand compounded by a shrinking population and shifting investor sentiment.

New government data released this week revealed that average new home prices across 70 cities fell 0.2 per cent in May, while second-hand home prices dropped by 0.5 per cent. These are the sharpest monthly declines in seven and eight months, respectively.

Investment in real estate was down 10.7 per cent in the first five months of 2025, extending a four-year slump that began with developer defaults and escalating debt crises in late 2020.

Premier Li Qiang recently called for “greater efforts” to halt the decline, but the data makes clear why Beijing is still struggling to restore confidence in the housing sector.

Demographic drag deepens

A more worrying headwind now confronting the market is demographic. Goldman Sachs estimates that China’s urban housing demand will remain below 5 million units per year in the coming years, a quarter of the 2017 peak of 20 million. Population decline, ageing, and continued urbanisation slowdown are behind the projection.

China’s population has fallen for three consecutive years, dropping by 1.39 million in 2024 alone, according to government figures. Birth rates continue to slide despite incentives introduced since the end of the one-child policy in 2016.

“Pronatalist policies are unlikely to succeed,” Tianchen Xu, senior economist at the Economist Intelligence Unit, toldCNBC. “They fail to address deeper issues like economic insecurity, costly childrearing, and cultural shifts.”

The result: school closures and crumbling demand in areas previously buoyed by education-linked housing premiums. Nearly 36,000 kindergartens shut down over the past two years, and student enrolment in preschools fell by more than 10 million.

A mother living in Beijing toldCNBCthat her apartment, purchased at double the city’s average to secure access to a top elementary school, has lost 20 per cent of its value in just two years.

A tale of two markets

While tier-I cities such as Beijing, Shanghai, and Shenzhen are showing flickers of recovery, smaller, lower-tier cities are in freefall. Sales in Shanghai have risen year-on-year, and developers are seeing some projects sell out on launch day.

Greentown China Holdings, for example, sold all 120 units of a luxury project in Shanghai within hours, generating nearly $1 billion. In contrast, places like Wenzhou face a bleak outlook. Developers continue to slash prices by as much as 50 per cent to entice scarce demand.

According to analysts at S&P Global Ratings, property prices in top-tier cities will remain flat in 2025, with modest gains in 2026. Meanwhile, homes in smaller cities are expected to drop another 4 per cent this year and 2 per cent next year.

Global capital shifts to Japan

As China’s property market languishes, global investors are looking elsewhere. Japan’s real estate sector has emerged as a major beneficiary. Foreign investors, including those from mainland China and Hong Kong, poured $11.2 billion into Japanese real estate in Q1 2025—6 per cent above the five-year average.

The weakening yen and Japan’s strong rental returns, averaging over 5 per cent annually since 2012, have further boosted investor appeal.

Major deals include co-living operator Weave Living and KKR’s acquisition of six high-end properties in Tokyo and MindWorks Properties’ purchase of a multifamily building in Minato Ward.

Despite targeted policies like mortgage rate cuts and subsidies for unfinished projects, analysts warn that any broad recovery remains elusive. Goldman Sachs predicts stabilisation may not arrive until the second half of 2026. The bifurcation of China’s housing market highlights the need for more nuanced, region-specific interventions.