Foreclosures in China

The market for foreclosed properties in China has expanded significantly, with residential foreclosure transactions totaling 150 billion yuan by 2023 and a 12% yearon-year increase in listings in the first half of 2024. With this expansion, the average success rate for foreclosure auctions dropped to 17% during the same period, pointing to considerable market challenges, particularly with low initial auction success rates. Despite the growing importance of foreclosures, few studies have examined the reason for the low success rates and the role of legal enforcement in the market.

Effective legal enforcement is crucial for foreclosure auctions. After a property is auctioned, the winning bidder pays the required amount to acquire it. However, the previous owner or tenants may refuse to vacate, preventing the purchaser from taking possession. In such cases, forced eviction ensures the purchaser can rightfully occupy the property. Since more effective legal enforcement can expedite the foreclosure process, it increases the likelihood of successful property recovery and facilitates lenders' ability to recoup losses.

In China, the legal basis for forcible eviction in judicial auctions is grounded in the “Civil Procedure Law of the People’s Republic of China”, which empowers courts to enforce evictions when judgment debtors fail to comply with effective civil judgments. Despite this strong legal foundation, enforcement is inconsistent. There are significant regional disparities in how these laws are executed, leading to varying degrees of risk and uncertainty for buyers. Some local courts may not rigorously enforce eviction measures, creating inconsistency and unpredictability in the judicial auction process.

In this paper, we aim to explore the following research questions. First, we seek to understand the causes behind the variations in legal enforcement of foreclosure auctions across different regions and within the same region. Specifically, we will investigate how economic development, local social stability, demographic factors, and the presence of organized crime influence courts' tendencies to enforce or avoid forced evictions in foreclosure auctions. Additionally, we will examine whether different types of lenders (e.g., institutional vs. individual; local vs. non-local) experience unequal treatment during the foreclosure process. Second, we aim to assess the effects of effective legal enforcement on foreclosure outcomes, bank lending behavior, and housing prices. Understanding these effects will provide valuable insights for policymakers in designing and implementing regulatory frameworks that ensure fair and efficient foreclosure processes, ultimately contributing to the stability and health of the housing market.