BY JONATHAN CHENG  |  ORIGINALLY PUBLISHED ON JULY 22, 2020  |  THE WALL STREET JOURNAL

BEIJING—Rents in China’s big cities have been falling in recent weeks, a sign of economic uncertainty in China’s otherwise gravity-defying residential property market.

Nationwide, average residential rent levels in large and midsize Chinese cities fell more than 2% in June from a year earlier, for a third consecutive month of declines, according to real-estate data company Beijing Zhuge House Hunter Information Technology Co.

Figures from the state-backed Chinese Academy of Social Sciences show rents in the capital Beijing, a city of more than 21 million people, falling 1.4% in June from the previous month. In the southern technology hub of Shenzhen, prices fell 3.2%, and in the central Chinese city of Wuhan, where the new coronavirus first emerged late last year, rents fell 6%.

“Landlords have been forced to lower their rents, and there still aren’t that many tenants,” says Zhang Chaofeng, an agent at a Beijing branch of Lianjia, a brokerage company with thousands of offices across the country. Mr. Zhang estimates vacancy rates in central Beijing are now roughly three times as high as a year ago.

A long-running trade war with the U.S. and now the coronavirus have weighed on rental prices.

In recent months, the pandemic has spared few economies, pushing up joblessness around the world and knocking down income levels, property values and rents.

If any country could buck the trend, it was likely to be China. Residential property prices in the world’s second-largest economy have proven resilient over the years, and continued their climb during the pandemic as many ordinary Chinese rushed to sock away money in the one asset class they believe is incapable of falling.

But while rents in cities such as Beijing have jumped more than 60% since 2012, the recent drop—the sharpest such decline in the past eight years—hints at the magnitude of the economic pain being felt in China’s cities, even as China releases second-quarter economic figures that show the overall economy rebounding 11.5% from the first three months of the year.

Faced with mixed messages in China’s rising property prices and falling rents, analysts point to the rental market as the better gauge of the economic reality.

“The deviation between the rent and home price indicates that there is a certain degree of a bubble in housing prices,” says Wang Ruochen, a researcher at the privately run E-House China R&D Institute. Despite the incongruity of home prices marching higher in the midst of great economic uncertainty, Mr. Wang said, the fall in rents reflects the reality that housing demand in China in fact remains rational.

Other indicators underscore the continued uncertainty: Retail sales fell again in June, while elevated joblessness has been stubbornly persistent—particularly for young college graduates, for whom unemployment surged last month to a record 19.3%.

The summer months are typically the peak season for Chinese residential landlords, as college graduates seek to put down roots while launching their careers. But shrinking job opportunities prompted by the coronavirus-induced downturn have changed that this year, particularly in so-called first-tier cities such as Beijing, Shanghai and Shenzhen, despite the largest class of graduating alumni in more than a decade.

“The epidemic stopped a lot of college graduates from coming to the big cities, and some tenants in big cities went back to their hometowns because of the high living costs and reduced opportunities,” says Huang Hui, senior analyst at Beike Zhaofang, an online housing-rental platform backed by SoftBank Group Corp.

Wang Hongze, who works at a Beijing moving company, has registered an uptick in business lately as newly jobless Beijing residents pack their things and return to their hometowns.

Between job losses, falling incomes, and uncertainty about the future, “for those tenants who changed houses, most of them moved to a worse one, with lower rents,” says Mr. Wang, 40 years old.

The impact is being keenly felt by landlords. In the second quarter of the year, one private gauge of average rental yield in 50 Chinese cities, which represent the amount of money landlords earn on investment properties, fell to near the lowest level over at least the past four years. Over that time frame, rental yields in Shenzhen fell by nearly one-third to 1.2%, according to E-House China.

If rents continue to fall, it could bring some rationality back to property prices, says Zou Linhua, a property-market researcher at the Chinese Academy of Social Sciences. “If the rental level in first- and second-tier cities continues to decline, it will lead to a cooling of the housing sales market in the second half of the year,” Dr. Zou said.

Rose Cao, 33, recently took advantage of the drop in rents to move into a new apartment unit in the same residential complex, with more space and better interior furnishings—and a 15% drop in rent.

“It’s the first time my rent has dropped since I came to Beijing in 2009,” said Ms. Cao, originally from the interior Chinese province of Shaanxi. Though she had to forfeit a month’s rent to her previous landlord, Ms. Cao, who works for an advertising company that has lost a number of clients after the pandemic broke out, decided she couldn’t afford to pass up the chance to lock in the monthly savings.

“I want to save some money to avoid economic uncertainty in the future,” she said.