NEWSOURCE21

Graham Stephan

Titles like this are usually clickbait, but I can say without exaggeration that China’s entire housing market has completely collapsed. As I write this, 20 years of gains have been fully wiped out in the blink of an eye. Housing makes up 70% of household wealth in China which means that an estimated $18 Trillion has vanished from the one asset that was never supposed to fall.

What’s worse is that this collapse isn’t slowing down.

Prices have crashed for 35 months in a row, and it’s becoming so bad that a lot of people are wondering: If this could happen in the world’s second largest economy, could the same thing happen here? Are we looking at a 2008 crisis but worse? We need to talk about exactly what’s happening, what this means for your money invested in the US, and whether our housing market is at the risk of heading this way.

A silent wealth trap

A house was never just a house in China. It was a wealth trap.

Until the 1990s, most housing in China was owned and provided by the government. But as the country opened up to the world and started to expand rapidly, they realized housing would need to be privatized. Why? Because:

Developers were incentivized to build faster
Banks were free to lend more
Families would buy homes of their own generating extra economic activity

This led to a real estate boom. Hundreds of millions of people moved from farms into cities. Incomes were rising, credit was cheap, and urban homeownership exploded from about 50% in 1996 to roughly 90% in 2023!

The thing is, Chinese families didn’t really have a lot of options on where to invest their money:

Their stock market was volatile (and frankly, not trusted)
Bank deposits paid almost nothing
Capital controls prevented you from investing abroad

Which all meant that real estate became THE default investment option for the average citizen, not just another investment option. A home was everything for them — a retirement account, a safety net, a college fund, and a social status marker, all rolled into one apartment.

By the peak, 70% of Chinese household wealth was tied up in housing! That’s twice as concentrated as here in the US. About 22% of urban households owned multiple homes!

How the bubble expanded

When this sort of craze kicks off, it creates a feedback loop which works as it’s supposed to in the beginning:

Families bought homes
Developers borrowed money to build more homes
Local governments sold them land – making up 40% of their revenue
Banks kept lending
Home prices kept rising, making the investment attractive
Households bought even more!

Every part of the economy had its hands in the real estate pie, and they were all in this together. At its peak, real estate and everything connected to it made up roughly a quarter of China’s entire economy. Prices increased nearly 700% from 2001 to 2017.

It even got so extreme that buyers would spend up to 23 times their annual salary to buy a home. Demand was so high that several cities used lottery systems to allocate them, and developers “pre-sold” apartments that didn’t even exist yet. Buyers were making mortgage payments on nothing but a promise.

If prices could only go up, what could go wrong? That’s exactly when it broke.

The collapse begins

By 2020, even the Chinese government could tell this was getting out of hand. Prices were skyrocketing, homes were sitting empty, smaller cities were wildly overbuilt, and developers were carrying insane amounts of debt. So Beijing stepped in with a policy called The Three Red Lines. It was a hard cap on how much developers could borrow, based on their debt-to-cash, debt-to-assets, and debt-to-equity ratios. But in real terms, these controls switched off the money printer for developers overnight.

Everything started to collapse.

The crisis started when Evergrande defaulted. They had borrowed over $300 Billion, and suddenly they couldn’t roll over their debt any more. Eventually, they were forced into liquidation. Country Garden, once the largest homebuilder in the country, defaulted on its dollar bonds shortly after.

When the two giants failed, a wave swept the entire housing market. The smaller developers couldn’t finish the millions of apartments they had already pre-sold. Regular families were now paying mortgages on homes that did not exist and might never exist, because the developer was no longer in business. In 2022, this got so bad that buyers across hundreds of stalled projects threatened to just stop paying their mortgage payments entirely. An estimated 1.5 trillion yuan of mortgages was tied to unfinished apartments.

The final domino began to fall soon after: Confidence.

Once people saw firsthand that their neighbor was paying for an apartment that never got built, they stopped buying. When they stopped buying, developers lost their pre-sale money needed to finish the construction. When that construction stalled, it scared away more buyers. The same feedback loop that pushed prices up for 20 years was now working in reverse. There was nothing anyone could do to stop it.

Other factors were making it worse: fewer marriages, slowing urbanization, an estimated inventory overhang (in tens of millions of empty or unfinished units). It was the perfect storm that caused the largest housing crash in history because China’s market was just so massive. How did this affect the average Chinese citizen?

The domino effect

China’s entire housing market is trading at the same levels as it was in 2006. 20 years of growth completely evaporated due to the crash, and the losses aren’t slowing down. 70 of their major cities fell another 3.5% YoY in May, and other areas are down more than 10%. Construction has fallen by a whopping 22%. The equivalent of their entire GDP was gone in a matter of a year.

Beijing is trying to stop the collapse by approving a 7 trillion yuan whitelist program to finish stalled projects, cutting mortgage rates, and lowering payments. But analysts expect prices to fall another 4% this year before maybe stabilizing in 2027. (And that’s a big maybe — even if the money is there, the structure is completely crumbling)

This just doesn’t affect housing prices.

When citizens have their wealth tied to property, a loss leads to a slowdown of spending and a loss of confidence. People start hoarding cash afraid of spending it on anything, and this kicks off a deflationary spiral. When real estate is tied to nearly 15% of all employment in China and land sales make up 40% of all local government revenue, you get a housing crash — and along with that, you get a wealth shock, a spending shock, a jobs shock, and a government revenue shock, all at once.

What does this mean for the US?

The effect on America

First, let me make it clear that this is not going to be another 2008 crisis.

American banks have very little direct exposure to Chinese real estate. Not because there are not takers, but because China’s capital controls and state-run banking system won’t let us. So your bank account, mortgage, and paycheck are not directly tied to some unfinished apartment tower halfway around the world. But there will be other effects:

1. Your portfolio

If you own an S&P 500 Index Fund, well, you own companies that sell a lot of stuff to China: luxury brands, automakers, semiconductor companies, industrial equipment, etc. When Chinese consumers are buying barely anything, this shows up as weaker earnings, and more volatility, in stocks you probably own without realizing.

2. Commodities

Chinese construction consumed roughly half the world’s steel, and 60% of its cement. That’s wild. But it also means that when China stops building, global demand for steel, copper, iron ore, and energy falls right alongside with it. If you’re invested in miners or energy, that’s bad news. But it’s potentially good news for construction costs and inflation here at home.

Have you diversified your portfolio enough to prepare for these risks? What’s your strategy?

3. The trade war effect

When China can manufacture but can’t sell to its own consumers, there’s only one way out: exporting and flooding the world with cheap goods. Cheaper stuff sounds great on the surface, but that puts pressure on American manufacturers to remain competitive and leads to trade tension. Whether this ends up lowering your prices or raising them depends on how Washington responds.

4. The dollar

Ironically, a property crisis in China is good for the US dollar. When the world gets nervous, money runs to safety in the US treasuries. A weakening yuan makes the dollar look stronger by comparison, and while people keep talking about the dollar being “dethroned,” this is pretty much the opposite scenario (If you’ve been planning a vacation to an international location like Japan, now is a great time, because their Yen is near a record low).

But with all of that said, could something like this happen here?

Not really. While some of the headlines look eerily similar, the US and China markets are very different for three reasons:

Concentration: Chinese households had 70% of their wealth in housing. Here, it’s close to a quarter, and even a total collapse won’t wipe out the country’s net worth.
Supply: China built too much. We’re still short an estimated 1.2 million homes.
Debt structure: Chinese buyers paid upfront for non-existent homes. American homeowners are sitting on 30-year fixed mortgages, locked in under 4%, with record home equity. Nobody is forced to sell.

With all of that said, we still have an important lesson to take away from this situation.

China’s collapse was more about concentration than about real estate.

China put 70% of its wealth into one asset because everyone believed the same thing: “Housing never goes down.” I hate to say it, but I see that same mindset here every single day. The asset might change, but people put everything they have into a house or a stock or a cryptocurrency, not because they understand the risk, but because it’s worked really well for the last 10 years. At some point, it becomes dangerous.

But that’s the whole lesson! Not that any particular market is dangerous, but that any asset becomes risky when it becomes your entire net worth.

Markets can be irrational on the way down as well. Chinese buyers kept trying to catch the bottom in 2023, in 2025, and in 2026. Every single time, prices kept falling because once confidence breaks, the pendulum often swings in the opposite direction. That’s exactly why I don’t try to time markets either way, neither while it’s going up nor down. If an entire government throwing trillions of dollars at the problem can’t call the problem, what makes you or I think that we can?

My answer, as always, is to diversify. Don’t sink everything into one sector, or one asset. Don’t speculate on a single investment just because it’s done well historically. China just gave the entire world a 20 year masterclass in what happens when a house stops being a home and turns into a lottery ticket. The best thing you can do is to learn from that and make sure that your financial life never depends on a single number going up.