People walk next to residential buildings in the coal city of Hegang in China on January 2, 2020. [Reuters]

Homeowners in small Chinese cities are battling a rare property market downdraft as buyers keep away, eroding the wealth of millions in a blow to already brittle consumer confidence in the world’s second-largest economy.

Smaller cities have been hammered by falling home prices for seven months since September, the latest tally of 70 major cities by China’s statistics bureau shows.

Yet this contraction is just the tip of the iceberg. The bureau’s data does not fully capture the property malaise across the roughly 300 cities classified as third-tier or lower, or even include the 2,000 smaller county-level cities and 40,000 towns.

By some estimates, small cities and towns account for around 1 billion of China’s 1.44 billion population. Buyer sentiment has broadly sagged since 2021 after a government crackdown on new borrowing by indebted developers sparked a liquidity crisis. Nationwide home prices fell late last year for the first time since 2015.

The negative wealth effect of depreciating home prices has rippled through to consumer confidence, curbing the desire to spend even on basic goods such as clothing.

Consumption has already been ravaged by Covid-19 outbreaks that locked down cities and disrupted local economies. Nationwide retail sales fell in March for the first time since 2020 while joblessness in 31 major cities hit a record.

“For Chinese consumers to come back full force, not only will the virus need to be vanquished, but the property sector will need to revive as well,” said Frederic Neumann, co-head of Asia economics research at HSBC in Hong Kong.

Homeowners with mortgages or those facing uncertain job prospects have already started to rein in spending.