China’s deepening property crisis has entered a more dangerous phase, one that now sits squarely on the balance sheets of its most fragile lenders.
Hundreds of thousands of foreclosed homes, seized by banks after borrowers defaulted, are failing to find buyers, even when offered at steep discounts. The sellers are not developers but China’s rural and regional banks, institutions already strained by weak capital buffers and rising bad loans.
A Reuters review of bank-supplied listings on JD.com Asset Trading Platform, one of China’s largest online auction marketplaces, shows a sharp surge in bank-initiated property sales in 2025, particularly in less-developed regions that have suffered the steepest home price declines.
Yet despite prices being slashed by 20 to 30 per cent below prevailing market rates, many auctions are drawing little interest, a worrying signal for both the banking sector and the broader economy.
Property as collateral — no longer safe
For decades, property was considered gold-standard collateral in China’s financial system. Rising home prices masked credit risk, encouraged aggressive lending, and gave banks confidence that defaults could be absorbed through asset sales.
That assumption has collapsed.
“The prices are shockingly low,” Li Youcai, a real estate agent in Dalian, in northeastern Liaoning province, told Reuters. “Currently, banks have a very large supply of foreclosed properties,” he said.
For example, a 160-square-metre apartment auctioned by the Dalian branch of Bank of Jilin was listed at 1.35 million yuan (about $192,000) — far below its roughly 2 million yuan market valuation at the time. Even then, the property failed to sell after two auction rounds in November.
Such cases are no longer isolated. They reflect a broader collapse in confidence in Chinese housing, particularly outside top-tier cities, where falling prices, excess supply, and weak income growth have chased away buyers.
A crisis years in the making
China’s property downturn, which began in 2021, is now the longest and deepest in the country’s modern history. It has become the single largest drag on the world’s second-largest economy.
Official data show average home prices in 2025 fell to levels last seen in 2018. New home sales by floor area plunged roughly 50 per cent from their peak, sliding back to 2009 levels.
According to Moody’s Analytics, weak sales and declining prices are expected to persist into this year, with no meaningful turnaround in sight.
The collapse of giants such as Evergrande and the debt defaults of dozens of other developers exposed a sector built on leverage, speculation, and perpetual price appreciation. But the second-order effects are now proving just as destabilising.
As developers failed and homeowners defaulted, banks were forced to seize collateral and are now struggling to offload it.
Rural banks under mounting pressure
The data show that smaller rural and regional lenders are bearing the brunt of the crisis.
In northwestern Gansu province, banks offered 4,292 properties for sale in 2025, nearly double the 2,398 listed in 2024, according to Reuters calculations based on JD.com auction listings.
In Sichuan, one of China’s most populous provinces, banks listed 1,909 residential and commercial properties last year, up from just 370 a year earlier.
Jilin province saw listings jump to 1,696 properties in 2025 from 371 in 2024, while Shanxi province recorded 519 listings, marginally higher than the previous year.
These regions share two vulnerabilities: weaker economic growth and sharper property price declines. As a result, demand for distressed housing is thin, and banks are often forced to hold onto properties that generate no cash flow while eroding capital.
A backlog created by legal delays
The current wave of sales is also the result of delayed judicial processes.
Many of the properties now flooding auction platforms were seized in 2022 and 2023 through lengthy court proceedings after borrowers and developers defaulted. Those processes typically took two to three years, leaving banks stuck with illiquid assets they could neither rent nor sell.
“Unless selling prices are very attractive or the projects are in good locations, it’s almost impossible to find clients for these banks,” Andy Lee, CEO of Centaline China, told Reuters.
According to UBS estimates, Chinese banks have cumulatively listed around 1.35 million foreclosed properties acquired through defaults since mid-2024, a staggering figure that underscores the scale of stress building up in the system.
A second wave of bad loans is coming
Worse, analysts warn this may only be the beginning.
Chinese banks are now facing a fresh wave of distressed assets as small business loans issued during the COVID-19 period mature. Many borrowers are struggling to refinance amid a sputtering recovery, forcing lenders to seize collateral, often property, once again.
UBS estimates that foreclosed housing units linked to bad loans will surge from 640,000 units in 2025 to 2.43 million units by 2027.
Sales of such properties are still small relative to China’s vast credit market, which includes roughly 37 trillion yuan in outstanding mortgages and 25 trillion yuan in household business loans, but the trend is troubling.
“It would be unsustainable if this becomes widespread,” Ming Tan, a director at S&P Global Ratings, told Reuters.
Falling prices, rising risk
Property prices are expected to remain under pressure. UBS forecasts prices will decline by about 10 per cent in 2026 and a further 5 per cent in 2027.
“The entire industry still has oversupply,” John Lam, head of Asia property research at UBS, told Reuters.
For banks, that means collateral values continue to fall even as disposal volumes rise, a dangerous combination that can rapidly erode capital adequacy.
Xiaoxi Zhang, an analyst at Gavekal Dragonomics, told Reuters the trend could mark the beginning of a much broader non-performing asset disposal cycle.
“We’re definitely in the largest non-performing-asset disposal cycle historically,” she said, warning that the ultimate impact will depend on how much loss banks’ capital buffers can absorb.
Why this matters beyond China
China’s leadership has repeatedly sought to ring-fence the property crisis, insisting it does not pose systemic risks. But the struggles of rural banks tell a different story.
These lenders play a critical role in financing agriculture, small businesses, and local governments. If they weaken further, credit transmission in already-fragile regions could seize up, deepening economic divergence within China.
More broadly, a banking sector weighed down by distressed property assets limits Beijing’s ability to stimulate growth and raises the risk of slow-burn financial instability rather than a sudden crash.
For now, China’s unsold homes are more than just empty buildings. They are silent markers of a system where falling property prices are no longer just a drag on growth but a direct threat to financial stability itself.
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