China's real estate collapse crisis! The wave of negative equity mortgages is coming, selling houses at a loss of 700,000 while still owing the bank.

China's real estate market has erupted into a systemic crisis, with the phenomenon of mortgage inversion spreading nationwide. In Nanchang, Jiangxi, a property valued at 1.2 million RMB per unit in 2022 has dropped to only 400,000 RMB in 2025, a decline of 67%. Homeowners have already repaid three years of loans, with total investments exceeding the current value, yet they still owe the bank 700,000 RMB. This wave of crisis stems from a collapse in demand, oversupply, and loan structure traps, with 70% of ordinary households' assets tied up in real estate, draining the consumption power of the middle class.

Definition of Mortgage Inversion and the Reality of China's Real Estate Collapse

The phenomenon of negative equity in mortgage refers to the situation where the current market value of a property is lower than the remaining mortgage balance. When homeowners try to sell their property, they not only cannot use the sale proceeds to pay off the loan, but also need to cover the difference out of their own pockets, even “paying out of pocket”. This has become the norm in the Chinese real estate market, especially against the backdrop of continuously falling housing prices in 2025, which has further triggered a wave of “supply interruptions” and “difficulty in selling houses”. This is not just an issue in individual cities, but a systemic crisis that the Chinese housing market is generally facing, affecting millions of families and amplifying the financial pressure on the middle class.

The Chinese real estate market has entered a four-year downturn since the “three red lines” policy was implemented in 2021. The decline is expected to worsen in 2025, with the collapse of demand being the primary reason. Economic slowdown, a youth unemployment rate exceeding 20%, and negative population growth have caused the willingness to buy homes in the market to drop to freezing point. When the main force of homebuyers, the younger generation, faces employment difficulties, the dream of buying a home naturally becomes unattainable.

The oversupply only adds fuel to the fire. Developers are facing funding chain breaks, leading to a surge in foreclosures. S&P predicts that China's new home sales will fall another 8% in 2025. The debt crisis of leading real estate companies like Evergrande and Country Garden remains unresolved, resulting in a large number of unfinished buildings and forced auction items flooding the market, further driving down prices. The loan structure trap is the deadliest. Chinese mortgages often adopt a “paying interest first, principal later” strategy, where initially almost only interest is paid, and the principal repayment is limited. Once the decline in housing prices exceeds 20%, it is easy to fall into negative equity for households.

This type of loan structure seems reasonable during a housing price increase cycle, as homeowners can enjoy asset appreciation. However, during a downturn, this design becomes disastrous. Suppose a house worth 1 million, with a down payment of 300,000 and a loan of 700,000. In the first five years, only 100,000 principal may have been paid back, but if the housing price falls to 700,000, the homeowner effectively has zero assets. If it drops to 600,000, it becomes negative equity, and selling the house not only does not recover the down payment but also requires an additional 100,000 to repay the loan.

Real Case Reveals the Wealth Collapse of Middle-Class Families

(Source: X)

According to social media users, in a building in Nanchang, Jiangxi, each house was worth 1.2 million yuan in 2022, but now it is only worth 400,000 yuan, with a fall of two-thirds. The owner has repaid the loan for three years, with a total investment exceeding the current value, yet still owes the bank 700,000 yuan. This case is highly representative; assuming the owner made a down payment of 360,000 (30%), took out a loan of 840,000, and repaid about 200,000 over three years (mostly interest), the total investment is 560,000, but the current value of the house is only 400,000, meaning a loss of 160,000. Worse, the remaining loan is about 700,000; if they want to sell the house to settle the debt, they will need to pay an additional 300,000.

Another case comes from Guangdong, where a man made a down payment of 600,000 before the pandemic, accumulated repayments of 500,000, and invested a total of 1.1 million RMB in a house, which now has a market value of only 900,000. This means that even if he sells the house, he will not only be unable to recover his investment but will also have to continue repaying the remaining loan. If he chooses to stop paying, the house will be auctioned off, and the auction price is usually 20-30% lower than the market price, which could ultimately fetch only 600,000-700,000. He will still need to repay the difference and bear the consequences of credit bankruptcy.

A more tragic case is the foreclosure tragedy. A man bought a house for 1.28 million RMB, and after defaulting on payments, it was foreclosed for only 600,000. The emotions at the execution site collapsed. This case shows that foreclosure is not a relief, but a deeper abyss. Assuming he made a down payment of 380,000 and took a loan of 900,000, after several years of repayments, he still has 800,000 principal remaining. The foreclosure of 600,000 can only cover part of the loan, leaving him with a 200,000 shortfall to repay, while also losing the down payment and years of repayment input, resulting in a total loss of over 600,000.

Typical Loss Path of Mortgage Inversion

Home Buying Phase: Pay a large down payment (usually 30%), exhausting family savings.

Repayment Stage: In the early stage, mainly paying interest, and the principal decreases very slowly.

Price Collapse: The property market value falls below the loan balance, becoming a negative asset.

Forced Sale: The selling price is insufficient to repay the loan, and the shortfall must be covered out of pocket.

Credit Bankruptcy: If unable to make up the difference, facing foreclosure and credit record stains.

These cases reveal the harsh reality of the Chinese real estate market: investments that were once regarded as “guaranteed profits” have now become black holes that deplete family wealth.

Systemic crisis threatens the economic stability of China

The recent wave of “mortgage inversion” has exposed the structural vulnerabilities of the Chinese economy. Firstly, the illusion of wealth has been shattered, as ordinary households have 70% of their assets tied to real estate. The sharp decline in housing prices will undoubtedly drain the consumption power of the middle class. When real estate, the “largest asset,” turns into a liability, household consumption will inevitably shrink, further dragging down the overall economy. The Chinese government is trying to stimulate consumption to boost the economy, but under the backdrop of shrinking real estate wealth, these efforts have had little effect.

Secondly, there is the risk of financial contagion. China's real estate once accounted for nearly 30% of GDP, and the rise in bad debts is likely to drag down banks and local finances. Bloomberg revealed on the 14th that Asian banks are being impacted by the latest round of the Chinese property crisis; if extension or refinancing agreements are not reached, over $1 billion in real estate loans could face default risks. One of these is a $940 million loan to Hong Kong developer Qiaofu Group, with participating banks including HSBC, Hang Seng Bank, Dahua Bank, and several Taiwanese financial institutions such as Banxin.

Another fund led by the private equity firm Gaw Capital failed to repay a $260 million loan that was due this week, which may lead creditors to declare a loan default in the coming days. These cases illustrate that the real estate crisis in China is not only affecting the domestic market but is also impacting international financial institutions. The banks involved in the loans are in a dilemma: repeatedly extending the deadline does not solve the industry problems, but forcing borrowers into default could result in loan losses.

The deterioration of the population structure has intensified long-term risks. By 2050, China's population is expected to decrease by 100 to 200 million, and the demand in third and fourth-tier cities may shrink for a long time. This means that the fall in housing prices is not a short-term adjustment, but may be a long-term trend. When the population decreases and cities shrink, the oversupply of real estate will persist for a long time, and the hope for a rebound in housing prices is bleak.

Taiwan's financial industry reduces exposure to China to mitigate risks

In recent years, due to the economic downturn in China and the continuous explosions of real estate companies, the exposure of Taiwan's financial three industries to China has continued to shrink. According to the latest statistics from the Financial Supervisory Commission, as of the end of August 2025, the exposure amount of the financial three industries (banking, insurance, and securities investment trust) to China is 802.055 billion, a year-on-year decrease of 201.754 billion, a reduction of 20.1%. Among them, the banking industry has reduced its exposure to China from 923.529 billion last August to 741.031 billion at the end of this August, a year-on-year decrease of 19.76%.

It is worth noting that the property insurance industry has had zero exposure to China since January 2023, totaling 32 months of “zero exposure.” This shows that Taiwanese financial institutions are fully aware of the risks in the Chinese real estate market and are actively reducing their exposure. However, as demonstrated by the loan case of the Kuo Fu Group, some Taiwanese banks still have risk exposure that needs to be closely monitored for further developments.

Looking to the future, China's housing market is likely to present a pattern of “urban stability, peripheral collapse”: first-tier urban areas (such as the Yangtze River Delta and the Guangdong-Hong Kong-Macau Greater Bay Area) can still be supported due to industry and population siphoning, while a vast number of second, third, and fourth-tier cities continue to hit rock bottom. The Chinese belief that real estate will “never fall” has been completely shattered, and rebuilding market confidence will take several years. Ordinary families are paying a heavy price for the past systemic imbalance.