September 10, 2026
Between 2021 and 2025, Chinese property investment fell by 46%, a collapse comparable to the 45% recorded in Japan between 1996 and 2010. Yet the scale of the correction determines neither its duration nor its outcome. Japan took two decades to clean up its sector after its land bubble burst. Could China speed up the process? Not without a structural transformation.
The scale of the declines shows a remarkable convergence. Chinese property investment fell by 46% between 2021 and 2025, while Japan recorded a 45% drop over the 1996-2010 period. This similarity in magnitude might suggest parallel trajectories.
However, housing starts tell a different story. In China, they collapsed by 78% between 2021 and 2025. In Japan, the contraction reached 65%, but over a much longer period (1996-2025). The Chinese correction is taking place at a markedly faster pace.
This observation invites a paradoxical conclusion: a faster adjustment does not mean a nearer exit. The initial intensity of the shock may even delay the recovery by prolonging uncertainty and aggravating financial strains.
In Japan, the property sector rested on a self-reinforcing cycle. Rising land prices allowed companies to borrow more by pledging their land as collateral. This mechanism inflated prices well beyond economic fundamentals.
When the bubble burst, the equation reversed. Asset prices fell, but debts remained intact. Companies had to focus on deleveraging, thereby reducing future investment. At the same time, banks rolled over loans that were rapidly becoming fragile, postponing the necessary restructurings.
Three factors allowed Japan to gradually clean up its sector. First, successive cuts in policy rates and public spending programmes cushioned the initial shock. Second, the accounting recognition of losses forced the financial system to face reality. Finally, bank recapitalisations restored lending capacity.
The result was slow but lasting. Non-performing loans at Japan's major banks fell from 8.4% in 2002 to 2.9% in 2005, signalling a cleaner portfolio. However, this transition required a decade of adjustment policies, revealing that the recognition of losses alone is not enough.
China is not going through a standard property crisis. Several phenomena combine to complicate the adjustment. Overbuilding persists despite falling housing starts. Demographic ageing structurally reduces demand for new housing. Developers are accumulating massive debts. Local governments depend excessively on land revenues to finance their budgets.
A critical psychological element is added: homes sold but not delivered amplify buyer distrust. This breakdown of confidence complicates any revival of the sector.
Beijing has adopted a multi-level strategy. The state is financing priority construction sites, supporting the purchase of unsold inventory and widening access to housing savings. The reform of 28 August explicitly favours sales of completed homes, a direct attempt to restore confidence.
For developers, three financing channels aim to replace dependence on pre-sales: access to credit, securities issuance and staggered land payments to local governments. This diversification is necessary, but it transfers risk to the banking system and public finances.
Reducing pre-sales legitimately protects buyers by shielding them from developer default risk. But this protection forces developers to finance more of the construction before collecting sales revenue. Their land purchases are likely to slow significantly.
Local governments, heavily dependent on land revenues, would immediately bear the consequences. These revenues have already fallen by 30.8% over the first seven months of 2026. A further slowdown in land sales could worsen the local fiscal situation.
The central state must therefore support this transition. This requires a transfer of fiscal resources to the provinces, the restructuring of existing debts and an adaptation of housing stock to the real needs of each region, rather than to growth targets.
Japan took two decades to get through its property crisis. Three elements were decisive: recognising losses rather than disguising them, cleaning up the banking system through recapitalisations, and supporting the transition macroeconomically.
China is now applying this playbook, but in a different context. Unlike Japan, it combines a property-driven financial crisis, demographic decline and the institutional dependence of local governments. Exiting a modern property crisis therefore requires recognising losses, but also collectively financing a transition towards a lastingly smaller sector, better aligned with demographic needs and economic fundamentals.
This is not investment advice.
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