Commentary: Why Top-Tier Cities Will Lead China’s Uneven Property Recovery

[para. 1] The year 2026 marks the start of China’s 15th Five-Year Plan. With the Chinese government focused on stopping the property market’s decline and promoting a recovery, the approach aims to steadily unleash pent-up demand. The process involves gradually adjusting the supply and demand relationship within the housing sector, setting new directions for market stabilization.

[para. 2] The future of China’s property market will depend primarily on three critical variables: the reduction of excess housing inventory, the response of household confidence to price changes, and the strength and effectiveness of government policies. These factors will collectively influence the speed and quality of the market’s recovery.

[para. 3] Projections for 2026 expect total commercial housing sales to reach 780 million square meters nationwide. First-tier cities are anticipated to represent 39.92 million square meters (5.1% of the total), second-tier cities 226.82 million square meters (29.1%), and third- and fourth-tier cities 512.26 million square meters (65.8%).

[para. 4] The decline in new-home sales in first-tier cities is largely attributed to a significant reduction in land supply. From 2021 onwards, land auctions have fallen sharply, with first-tier city planned construction areas down 65% from the 2017-2020 average. The estimated full-year supply for 2025 is about 12.68 million square meters (a 28% year-on-year drop).

[para. 5] Despite restricted supply, demand remains resilient in major cities due to strong economies, job prospects, urban resources, and improved public services. Policy changes, such as easing purchase limits and adjusting transaction taxes, further support this demand. Urban redevelopment initiatives and the drive for higher-quality housing also tap into growing upgrade demand. Although new-home sales volumes in first-tier cities will decline in 2026, their share in the national market is forecast to rise.

[para. 6] Price-wise, new homes in top-tier cities are performing better than secondhand homes. Data from the National Bureau of Statistics shows a marginal 1.2% yearly decline in first-tier new-home prices during the first 11 months of 2025, compared to a sharper 5.8% drop in the secondary market. Shanghai, in particular, saw new-home prices rise by 5.1% in 2025. This outperformance is driven by population inflows, product innovation, a more sophisticated supply mix, and supportive policies.

[para. 7] Second-tier cities are expected to face a decrease in new-home sales in 2026, with significant variation among them. Factors influencing demand include ongoing population inflows (notable in Hefei, Hangzhou, and Chengdu), a liberalized policy setting, and product upgrades. The sales forecast for 2026 is about 226.82 million square meters, maintaining around 29.1% of the national total.

[para. 8] By contrast, third- and fourth-tier cities will see a further reduction in their market share. Having peaked in 2021, sales levels in 2024 fell to 53% of that high. Forecast 2026 sales volumes are 512.26 million square meters (65.8% of the total), reflecting ongoing weakness in new demand.

[para. 9] The housing market’s inventory situation continues to improve. Completed-but-unsold homes declined for eight straight months, reaching 760 million square meters by October. Uncompleted unsold homes dropped to 2.57 billion square meters (down 281 million year-on-year), and undeveloped land banks are about 2.3 billion square meters.

[para. 10] Nevertheless, buyer confidence remains subdued. Factors include declining secondhand home prices (a 5.7% yearly drop in top cities by November 2025) and a glut of listings. Foreclosure prices also fell by 12.3% in 2025’s first ten months. Nevertheless, the recovery in rental yields to 1.82% in first-tier cities by November 2025 (approaching 10-year government bond yields) is enhancing real estate’s investment appeal.

[para. 11] Policy support is advancing on two main fronts. First, a new development model enhances regulatory controls, legally separates development projects, and encourages project-based financing, with over 7 trillion yuan ($985 billion) in loans approved by October 2025. Second, the promotion of high-quality “good houses” is part of the new five-year plan, guided by updated national standards since May 2025. This shift aims to stabilize prices, encourage market upgrades, and satisfy consumer aspirations for better living environments.

[para. 12][para. 13] These developments are based on analysis by Xia Lei, chief economist at Sealand Securities. The opinions expressed are those of the author and do not necessarily represent Caixin.