China’s decades-long construction boom has led to severe overbuilding—particularly in lower-tier cities—resulting in a property sector crisis with far-reaching consequences.

Stanford Center on China’s Economy and Institutions (SCCEI) | China Briefs

Source: Kenneth Rogoff and Yuanchen Yang (2024). Rethinking China’s Growth. Economic Policy

China’s building boom has reshaped the physical and economic landscape of the country, lifting hundreds of millions out of poverty and transforming China into a global powerhouse. But the crisis in China’s property sector has exposed diminishing returns to building. Where has the country overbuilt most and what are the implications?  

In Brief by Probe International

China’s real estate and infrastructure (31.7% of GDP in 2021) has fueled growth but most of the country’s building has occurred in less wealthy tier 3 cities facing population decline and debt crises. Per capita floor space (49 m²) trails the U.S. (65 m²), while the reliance on land sales by tier 3 cities (43–46% of revenue) and soaring debt ratios expose systemic risks. Returns diminish as housing stock grows — a model now unsustainable say authors of a report on China’s construction-led growth.

Construction Overhang & Diminishing Returns:

• Unfinished Projects Surge: In tier 3 cities, the ratio of housing under construction to completed units soared from 6x (2011) to 10.6x (2020), reflecting developer struggles amid weak demand and funding shortages. Prices stagnated in tier 1 cities but declined in tier 3, mirroring trends in commercial real estate.
• Infrastructure Mismatch: High-speed rail expanded faster than passenger growth, adding to China State Railway’s 6 trillion yuan debt. Infrastructure investments (roads, sewage) remain skewed toward tier 3 cities despite their economic vulnerabilities.
• GDP Growth Erosion: Real estate investment initially boosted growth, but overbuilding (housing stock quadrupled between 2010–2020) reduced returns. Cities with above-average housing stock grew 1.1–2.2 percentage points slower annually, signaling diminishing returns.

Debt Dependency & Fiscal Risks:

• Local Government Debt Spiral: Cities with high real estate investment faced elevated debt-to-GDP (via Local Government Financing Vehicles) and bond-to-GDP ratios.
• Land Sale Reliance: Tier 3 cities derived 43% of revenue from land sales (46% in tier 2, 30% in tier 1), tying fiscal health to a faltering property market.

Read the original report in full at the publisher’s website here.