Chinese homeowners are losing conviction in their decades-long belief that property is a reliable store of wealth, undermining even coveted markets like Shanghai and adding pressure on authorities to find new sources of economic growth.

Asking prices in the financial hub have slumped for three straight months, falling to the lowest level since before China emerged from Covid lockdowns at the end of last year, according to data compiled by Centaline Group.

Despite surging inventory, transactions in the city tanked by one third to about 16,000 units in May compared with March, the Economic Observer reported this month.

Interviews with homeowners, real estate agents and analysts suggest the downturn has been fueled by waning faith that property will always be one of China’s safest investments.

While that shift in mindset has in some ways been welcomed by policy makers seeking to rein in speculative buying, the risk of a deeper-than-desired slump is rising at a time when the broader economy is losing momentum. Longer term, authorities may struggle to replace real estate as a key driver of growth and bulwark of the nation’s vast middle class.

“Selling pressure is really piling up here” in Shanghai, said Jun Li, chief investment officer at Power Sustainable (Shanghai) Investment Management, a Canadian financial firm. “It seems homeowners have reached a consensus that the market has peaked.”

Cashing Out

Song, a banker who recently sold his apartment in Shanghai’s prestigious Jing’an district for about 10 million yuan ($1.4 million), said he views this as one of the last windows to cash out of the property boom.

The 35-year-old still owns other properties in China with his family, but wants to reduce exposure to the sector due to expectations of property taxes and a prolonged slowdown in the sector. He asked to be identified by his last name for privacy reasons.

His experience is matched across the country. Existing home prices in 100 cities recorded the biggest decline in May since at least 2022, according to data compiled by real estate research firm China Index Academy.

“Shanghai has the most sluggish existing-home market in China right now,” said Yan Yuejin, a research director at E-house China Research and Development Institute. “Across the nation, supply and demand in the secondary market have also deteriorated.”

Homeowners in the southern metropolis of Shenzhen have cut prices to the lowest since October 2016, according to data compiled by Centaline Group.

People are seeking to sell due to concerns about the economic outlook, financing needs for cash-strapped businesses and unemployment, Li said.

In Hangzhou, the home base for Alibaba Group Holding Ltd., a seller in the suburbs cut asking prices by 17% after failing to find a buyer in six months, according to a housing agent surnamed Gong, who requested to be identified by her last name because she wasn’t authorized to speak publicly.

The weakening sentiment in China’s real estate sector is prompting policy makers to weigh new support measures to keep the economy afloat, Bloomberg reported this month.

Regulators are considering reducing down payments in some non-core neighborhoods of major cities, lowering agent commissions on transactions, and further relaxing restrictions for residential purchases.

Different Cycle

The days of roaring demand are unlikely to come back any time soon, according to Goldman Sachs Group Inc. analysts, who said China could experience an “L-shaped” real estate market.

This “cycle is different from previous rounds, as policymakers appear very determined not to use the property sector as a short-term stimulus tool,” Goldman analysts wrote in a June 11 note. “We believe the policy priority is to manage the multi-year slowdown rather than to engineer an up-cycle.”

Read More: China Home-Price Growth Weakens as Housing Recovery Falters

Longer term, China is experiencing a structural shift due to its aging population, and limited scope for moving more people into cities. The country’s urbanization rate is expected to peak at about 75%, up from 64.7% in 2021 — all of which is weighing on sentiment.

Such pessimism is increasingly showing in Shanghai, as tough Covid measures in the last three years and weakening confidence in China’s economic outlook pushed homeowners and tenants — many of whom are expats — to pack and leave.

Shanghai Exodus

Favored by foreign companies, Shanghai was home to a quarter of China’s expatriate population before 2022. The city saw an exodus after the lockdown that kept nearly 25 million people confined to their homes for more than two months.

About 25% of Germans living in the city left in the fallout, while the number of French and Italian citizens registered with their governments each fell by 20%, according to a report by the Shanghai chapter of the European Union Chamber of Commerce early this year.

In Lianyang, a downtown neighborhood popular with expats and financiers in Shanghai, residential prices have slid 15% to 20% from record highs in mid-2021, according to a local property agent who asked to be identified by her surname Liu, because she wasn’t authorized to speak about the matter publicly.

Yi, a 31-year-old Shanghai resident, sold her suburban home in April for 4 million yuan, representing a steeper-than-expected 11% discount to her initial asking price. Second-hand inventory reached a record-high at 200,000 units that month, according to the Economic Observer.

She was in urgent need of cash and requested to be identified by her last name for privacy reasons. “It’s a buyers’ market now,” she said.

--With assistance from Lulu Yilun Chen.