Fragmented property rights and their risks on foreclosed housing: a qualitative comparative analysis based on judicial auctions in China

The study examines judicial auctions of foreclosed housing in China amid a sharp rise in mortgage defaults and a sluggish real estate market. Foreclosed properties must be sold via online judicial auctions per Supreme People's Court rules since 2016. In 2023, 533,607 foreclosed units were listed nationwide, with an average transaction rate of 28.38% and very high abortive rates in many cities, underscoring systemic debt stress. Existing research focuses mainly on pricing mechanisms and stigma effects that depress foreclosure prices, and on improving online disclosure to reduce information asymmetry. However, prior work overlooks property-rights risks specific to China’s fragmented regime of land-use rights and housing ownership across diverse categories (e.g., CH, AH, MH, SEH, RH, EAH, IH, SPRH). The paper addresses two questions: how different configurations of property-rights risks affect foreclosure auction outcomes, and what role credible commitments by courts play in mitigating these risks and facilitating successful sales.

Grounded in new institutional economics, property rights are viewed as a bundle of rights (use, income, transfer) and clear private rights lower transaction costs. China’s reforms separated land ownership from land-use rights (1988 constitutional and legal changes) and later separated housing ownership from land-use rights, institutionalizing fragmentation. This fragmentation produces incomplete or uncertain rights that elevate transaction costs and hinder market functioning. Prior studies document foreclosure price discounts and stigma, the role of online disclosure in mitigating asymmetry, and the persistence of markets even with incomplete rights (e.g., small property-rights housing). Yet, the foreclosure literature has not analyzed how fragmented property-rights risks—across categories such as commercial housing (CH), apartment housing (AH), marketized housing (MH), state-owned enterprise housing (SEH), relocation housing (RH), economic affordable housing (EAH), illegal housing (IH), and small property-rights housing (SPRH)—shape auction success or failure. The paper conceptualizes three risk types arising from fragmentation: cost risk (linked to land status and disclosure of transaction costs), acquisition risk (integrity of property rights from the combination of housing ownership and land-use rights), and usufruct risk (discretion to exercise habitation, income, transfer, inheritance), and posits that credible commitments by courts can moderate these risks.

Design: Crisp-set Qualitative Comparative Analysis (cs-QCA) is used to analyze causal configurations rather than single-variable effects, fitting the binary nature of auction outcomes and decision conditions. The analysis follows necessity and sufficiency testing, then truth-table construction and solution derivation using fs/QCA 3.0. Cases and data: 136 foreclosure auction cases from online judicial auction platforms (Jingdong and Ali) across 20 Chinese cities, selected via a most-similar-case design. Inclusion criteria: properties in provincial capitals/municipalities’ main urban areas; prices comparable to prevailing second-hand markets (excluding villas/high-end); clear initial auction outcomes (success or failure); sufficient information to code all variables. Sources include Auction Notices, Property Evaluation Reports, Notices of Assistance in Execution, Confirmations of Auction Results, and Notices of Enforcement; plus 152 due diligence reports from a real estate agency. Variables: - Outcome: Initial auction result (success=1; fail=0). - Cost risk: Land status (LS: leased=1; allocated/illegal=0). Disclosure of transaction costs (DTC: one or more items disclosed=1; no disclosure=0). - Acquisition risk: Integrity of property rights (IPR: AH/CH=1; MH, RH, EAH/SEH, SPRH/IH=0). - Usufruct risk: Discretion of property rights (DPR: negotiable tenancy/full discretion=1; incompetent/shared rights, fraudulent contracts, illegal occupation=0). - Moderator: Credible commitment by court (CC: one or more commitments=1; none=0). Commitments include removing illegal occupation, taking responsibility for defects, assisting in obtaining ownership, and sharing additional taxes. Analytic procedure: Necessity analysis for single conditions showed no condition with consistency ≥0.8 (e.g., CC had the highest consistency at 0.727). A truth table with 2^5=32 possible configurations was created. Thresholds: case frequency=1; consistency=0.8. Intermediate solutions were adopted, combining core and peripheral conditions. Overall solution metrics for successful auctions: solution consistency=0.879; solution coverage=0.439. Heterogeneity analysis was conducted by grouping cases by land status (higher LS: AH/CH; lower LS: MH/SEH/RH/EAH/IH/SPRH).

- No single variable is necessary for success (no condition reaches consistency ≥0.8). CC shows the highest necessity consistency (0.727) but is not by itself necessary or sufficient. - Six sufficient configurations lead to successful auctions (each with consistency ≥0.8), with overall solution consistency 0.879 and coverage 0.439. Illustrative pathways include: 1) ~LS*DTC*IPR*~DPR: Non-leased land coupled with clear cost disclosure and high IPR can offset low DPR. 2) LS*DTC*~IPR*DPR and 3) LS*DTC*~IPR*CC: With leased land and clear DTC but low IPR, success hinges on high DPR or the presence of court commitments. 4) ~LS*IPR*DPR*CC: For non-leased land (often higher transaction costs), higher IPR and DPR combined with CC enable success (e.g., EAH, MH cases). 5) LS*~DTC*IPR*DPR*~CC and 6) LS*~DTC*IPR*~DPR*CC: With leased land and high IPR but low DTC, success depends on either high DPR without CC or the presence of CC to compensate for low DPR. - Empirical illustrations show courts’ commitments can overcome low DPR (e.g., long-term leases or illegal occupation) or low IPR (e.g., relocation housing without title at auction time) by assisting with vacancy, clearing occupation, or helping obtain ownership. - Heterogeneity by land status: • Higher LS (AH/CH): Five configurations (solution consistency=0.864; coverage=0.475). Clear DTC is pivotal for cases with lower IPR; CC and/or DPR can further enable success. Where DTC and CC are low, high IPR and DPR together are key. • Lower LS (MH/SEH/RH/EAH/IH/SPRH): Two configurations (solution consistency=0.909; coverage=0.385). For non-leased land, clear DTC and higher IPR aid success. For properties like IH/SPRH, success relies on higher IPR and DPR plus strong CC. - Substantive insights: Leased land-use rights and transparent cost disclosure reduce cost risk and facilitate success; higher IPR and DPR reduce acquisition and usufruct risks; credible commitments from courts can reconcile weak DTC, IPR, or DPR and materially improve auction outcomes.

The findings demonstrate that auction outcomes for foreclosed housing in China are driven by configurations of property-rights risks shaped by fragmented land and housing regimes, rather than by any single factor. Leased land and transparent cost disclosure directly reduce transaction costs under information asymmetry, supporting bidder participation. High IPR (clear, secure ownership and land-use rights) and high DPR (ability to occupy, derive income, and transfer) reduce acquisition and usufruct risks, boosting willingness to bid. Crucially, credible commitments by courts function as institutional assurances that can compensate for weak DTC, low IPR, or low DPR by pledging assistance in clearing occupation, rectifying defects, helping secure title, or sharing additional taxes. This addresses the research questions by specifying which combinations of risks and court commitments are sufficient for auction success and under what land-status heterogeneity. The results underscore the importance of institutional design and enforcement capacity in stabilizing foreclosure transactions within a stressed real estate finance system.

China’s policy-driven separation of land ownership from land-use rights and of housing ownership from land-use rights fragmented property rights and created distinct cost, acquisition, and usufruct risks in foreclosure auctions. Using cs-QCA on 136 cases across 20 cities, the study shows that success depends on specific configurations: leased land-use rights and transparent cost disclosure reduce cost risk; higher IPR and DPR diminish acquisition and usufruct risks; and credible commitments from courts can reconcile weak conditions and enhance success. Heterogeneity analysis reveals that for AH/CH, DTC is especially important, while for MH/SEH/RH/EAH/IH/SPRH, higher IPR and DPR plus CC are often decisive. Policy implications include strengthening credible commitments and legal documentation, mandating comprehensive pre-auction disclosures, standardizing procedures, reducing administrative costs, building centralized information systems, improving court–bank coordination, and educating buyers. Future research could extend to larger, multi-period datasets, compare cs-QCA with fs-QCA or hybrid approaches, explore regional institutional variations across China, and evaluate the long-term post-auction realization of rights promised by court commitments.