China Rebuilds Housing Finance Around Delivery Security, but Demand Remains the Missing Piece

The reforms address a fundamental weakness in China’s traditional housing model. Developers historically began selling apartments long before completion and used deposits and mortgage proceeds to finance construction, purchase more land and repay other obligations. This system supported rapid expansion when sales were rising, but it became unstable when the property downturn intensified after 2021. Developers including China Evergrande defaulted, construction stopped at numerous projects and some buyers were left servicing mortgages on homes that had not been delivered. Presales nevertheless remained dominant, representing about 68 per cent of new-home sales by floor area in 2025.

Under the new framework, mortgage proceeds for presold housing will be released only after the developer submits the project’s completion filing, when the property has passed the necessary checks and is considered ready for occupation. Each development will also be linked to a lead bank that provides or coordinates project financing and monitors the use of funds through project-specific accounts. This arrangement is intended to prevent developers from transferring money between unrelated projects or using customer payments for aggressive expansion. Construction risk therefore shifts away from individual buyers and toward developers and financial institutions that are better equipped to assess and manage it.

The difficulty is that safer transactions do not automatically create stronger demand. From January to July 2026, China’s real estate investment fell 19.2 per cent year on year, while residential sales declined 12.7 per cent by floor area and 13.2 per cent by value. Residential construction starts dropped 24.6 per cent, and individual mortgage funding received by developers contracted 23.5 per cent. These figures indicate that households are delaying purchases not only because they fear incomplete projects, but also because they expect prices to remain weak and remain cautious about employment and future income. Extending mortgages to 40 years can reduce monthly repayments, particularly for younger buyers, but it also increases the total interest paid over the life of a loan and does not remove the risk of further price depreciation.

The financing changes will also reshape competition among developers. Companies will no longer be able to depend as heavily on early mortgage proceeds to cover construction costs, meaning they will need more equity, development loans or other long-term financing before receiving the full sales proceeds. Large state-backed or financially healthy private developers should be better positioned to absorb this longer cash-conversion cycle. Smaller companies with weak liquidity may have to reduce their land purchases, form partnerships, sell projects or leave the market. The result could be faster consolidation around developers with stronger balance sheets and more reliable delivery records.

Banks will assume a more central role in the new system. The lead-bank structure requires lenders to assess individual project economics, construction schedules and cash flows instead of relying mainly on the developer group’s overall credit profile. Better supervision could reduce the diversion of presale funds and improve completion rates, but it also increases banks’ exposure to construction and market risk. Financial institutions may therefore become more selective, directing credit toward viable projects in stronger cities while limiting financing in locations with large inventories and weak population growth.

The initial market response reflected these cash-flow concerns. Mainland and Hong Kong-listed property indices fell sharply after the reforms were announced, as investors focused on the loss of early mortgage proceeds and the possible reduction in land purchases and new construction. In the longer term, however, the reforms could create a healthier market by replacing high-turnover, debt-driven expansion with a model focused on project completion and transparent financing. Success should not be measured by an immediate jump in home sales. The more meaningful indicators will be fewer unfinished projects, stronger delivery rates and a gradual recovery in buyer trust. A sustained housing rebound will still require firmer household income expectations, reduced inventories and greater confidence that home prices are approaching a stable level.