China's recent efforts to revive its property market are yielding mixed results. While major cities like Beijing and Shanghai are showing tentative signs of improvement, with a 27.7% and 8.1% increase in daily used-home transactions respectively compared to April, smaller towns continue to struggle. This uneven recovery raises concerns about the long-term health of the market and its impact on the broader USD 18 trillion Chinese economy.

In May 2024, China introduced a series of measures to stimulate the property market. These measures included lowering mortgage rates to make homeownership more affordable for potential buyers, reducing down payments to ease the initial financial burden and potentially increase demand, and authorizing municipalities to purchase unsold apartments and convert them into social housing. This last step aimed to reduce excess inventory and stabilize property prices. While these policies were intended to address the specific needs of different regions, their impact has been uneven.

Data from real estate research firm China Index Academy indicates a significant increase in daily transactions for second-hand homes in Shanghai and Beijing compared to April. Shanghai saw a 27.7% rise, while Beijing experienced an 8.1% increase. Real estate agents report a rise in inquiries and property viewings, suggesting renewed buyer interest, particularly for older apartments in better locations which tend to sell faster.

While larger cities show some promise, the situation in smaller towns with populations under 1 million remains bleak. Data suggests a decline in year-on-year sales for a group of 30 cities, including smaller centers. This indicates continued buyer hesitation, potentially due to concerns about excess supply and developer financial health. Unlike major cities where supply and demand are more balanced, smaller towns face an oversupply of unsold properties, which puts downward pressure on prices. Additionally, recent financial troubles faced by developers have shaken buyer confidence, leading to doubts about whether projects will be completed.

Experts attribute the uneven recovery to a "long-term structural oversupply problem" in smaller cities. Zhang Zhiwei, chief economist at Pinpoint Asset Management, elaborates that while policies in large cities are more effective due to balanced demand and supply, smaller cities face a persistent structural oversupply issue that is harder to resolve and will require more time to address.

The struggling property market, once a major economic driver contributing nearly a quarter of China's GDP before the 2021 crisis, poses a significant threat to the country's growth. Analysts expect the government to provide further support, but warn against a "big-bang" approach to avoid bailing out overextended developers.

The sluggish market in smaller cities disproportionately affects local economies. With consumer spending heavily tied to the housing market, a slowdown can lead to a decrease in spending and economic activity. Additionally, small regional banks that are heavily exposed to the property sector face potential risks if property values continue to decline.

Analysts predict a gradual recovery for the sector, with a potential "L-shaped" pattern - a slow rise after a sharp decline. However, long-term concerns remain regarding the oversupply in smaller cities and the financial health of developers. Addressing these issues will be crucial for a sustained recovery and the overall health of the Chinese economy.

Goldman Sachs analysts anticipate additional easing measures in the coming months. However, they have cautioned in a recent note that due to persistent weaknesses in lower-tier cities and among private developers, these easing measures might only result in an L-shaped recovery for the property sector in the years ahead.

The success of China's property market recovery efforts will depend on their ability to address the specific challenges faced by smaller cities and ensure a stable and healthy environment for both buyers and developers.