S&P’s latest downgrade points to a property crisis that has shifted from a cyclical downturn into a structural constraint on China’s economy, with mounting risks for growth, developers, banks, and local governments.
China’s property slump is deepening into what ratings agency S&P Global now describes as a prolonged and entrenched downturn, one that shows little sign of stabilizing barely two months into 2026.
In a sharply more pessimistic assessment released on Sunday, S&P said primary real estate sales are likely to contract by 10% to 14% this year, a far steeper decline than the 5% to 8% drop it forecast as recently as October.
The downgrade reflects how quickly conditions have deteriorated and how limited the policy response has been relative to the scale of the problem. According to S&P, the excess supply in China’s housing market has grown so large that market forces alone are no longer capable of clearing it.
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“This is a downturn so entrenched that only the government has capacity to absorb the excess inventory,” the analysts said.
At the heart of the problem is a property sector that expanded aggressively for more than a decade on the back of easy credit, rising household wealth, and strong expectations of price appreciation. At its peak, real estate and related industries accounted for more than a quarter of China’s economic activity. That model began to unravel after Beijing moved to rein in developers’ debt-heavy expansion, triggering liquidity stress across the sector and exposing long-standing overbuilding.
What has followed is one of the sharpest property corrections in modern Chinese history. Annual sales volumes have halved in just four years. Yet construction did not slow in line with falling demand. S&P said developers continued to complete projects even as buyers stayed away, resulting in a sixth consecutive year of rising unsold new housing.
This growing inventory overhang is now weighing heavily on prices. S&P expects home prices to fall by a further 2% to 4% this year, extending declines seen in 2025. The agency said lower prices are feeding directly into weaker demand, as households delay purchases in the expectation that values will fall further.
“Falling prices erode homebuyers’ confidence,” the report said. “It’s a vicious cycle with no easy escape.”
What alarms analysts most is that the weakness is no longer confined to smaller cities and lower-tier markets, where oversupply has long been most severe. S&P said price declines in China’s biggest cities worsened in the fourth quarter of last year, undermining hopes that these markets could anchor a broader recovery.
Beijing, Guangzhou, and Shenzhen all recorded home price declines of at least 3% in 2025, according to the report. These cities had previously been viewed as relatively healthy, supported by higher incomes, population inflows, and deeper demand. Shanghai stood out as the sole major city to post gains, with prices rising 5.7% last year, but S&P suggested that this strength is increasingly isolated and insufficient to offset nationwide weakness.
The pace at which forecasts have deteriorated illustrates how far the market has slipped. In May last year, S&P was still projecting a modest 3% decline in new home sales. By October, that estimate had been revised to an 8% drop. Actual sales ended up falling by 12.6% in 2025, to 8.4 trillion yuan ($1.21 trillion), less than half the 18.2 trillion yuan recorded at the market’s 2021 peak.
The prolonged slump is intensifying financial stress among developers, many of whom are already operating with thin margins and limited access to new funding. S&P warned that if sales fall another 10 percentage points below its base-case scenario this year and next, four of the 10 Chinese developers it currently rates could face further downward pressure on their credit ratings.
That assessment does not include China Vanke, once one of the country’s largest and most financially stable developers, which last year sought to delay repayments on part of its debt. Vanke’s difficulties have been widely seen as a symbol of how deeply the crisis has spread, even among firms previously considered relatively safe.
The implications extend beyond developers. Weak property sales and falling prices are also straining local government finances, which rely heavily on land sales for revenue. Sluggish land auctions have reduced fiscal resources just as many local authorities face rising spending needs and debt-servicing pressures. Banks, meanwhile, remain exposed through mortgages, developer loans, and indirect links to the property sector, even though regulators have sought to contain systemic risks.
Despite these pressures, Beijing has so far refrained from launching a large, nationwide rescue package for real estate. Instead, policy measures have focused on targeted support, such as easing mortgage restrictions in some cities, encouraging banks to extend loan maturities, and allowing local governments or state-linked firms to buy unsold homes for conversion into affordable housing. S&P said these efforts remain piecemeal and too small to materially reduce excess supply.
At the same time, Chinese authorities have signaled a strategic shift toward advanced manufacturing and high-technology industries as new engines of growth. However, analysts question whether those sectors can scale quickly enough to compensate for the drag from property.
Last month, U.S.-based research firm Rhodium Group said China’s push into high-tech industries is not yet large enough to offset the property slump, leaving the economy increasingly reliant on exports for growth. That dependence, it warned, exposes China to rising trade tensions at a time when global demand remains uncertain.
S&P’s assessment reinforces those concerns. With housing still a key store of wealth for Chinese households, prolonged price declines risk weighing on consumer confidence and spending more broadly. That, in turn, complicates Beijing’s efforts to rebalance the economy toward domestic consumption.
Top policymakers are expected to outline economic priorities and growth targets at a key parliamentary meeting next month. Markets will be watching closely for any signal that authorities are prepared to take stronger action on property, either through larger-scale inventory purchases, fiscal support, or more aggressive measures to stabilize prices and restore confidence.