Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
About 70 per cent of Chinese household wealth is estimated to be tied up in real estate. That is high by global standards. In the US, the share is closer to 27 per cent. This disproportionate exposure has raised the stakes for the stability of the housing market.
Between 2003 and 2010, home prices in major cities such as Shanghai, Beijing and Shenzhen rose by more than 150 per cent, marking the beginning of a sustained rise in property values. Shenzhen recorded annual gains of more than a fifth at its peak, turning homes into high yield assets and home ownership into a national obsession.
Then cracks began to emerge. A relentless downturn began in 2020, and real estate developer Evergrande defaulted on its borrowings in 2021. Even so, many market participants assumed the correction would be short lived. Each round of easing mortgage regulations and stimulus announcements fuelled rallies in developer stocks. Retail investors treated each dip as a buying opportunity.
In reality, deeper structural shifts were at play. China’s population is shrinking, the pace of urbanisation is slowing and the younger generation is both less willing and less able to enter the housing market. Urban youth unemployment remains high at 16.5 per cent, according to official data, and many young locals are opting out of the traditional career path entirely. With fewer buyers entering the market, there are not enough people to drive the next wave of homebuying demand.
There are still signs of hope. Analysts estimate that average home prices have fallen by around 30 per cent from their 2021 peak, which is seen as a potential floor. In major cities, existing home sales have picked up modestly this year and unsold housing inventories have fallen to their lowest levels since the downturn started.
Yet that will not be enough to help developers out of their current predicament. The recovery remains concentrated in the market for existing homes, while primary sales, the core revenue stream for homebuilders, continue to decline. In April, new home sales by China’s 100 largest developers fell 9 per cent from the previous year. The traditional presale model, in which buyers paid upfront in exchange for the promise of future delivery of homes, has lost credibility due to developer defaults and project delays.
Slowing declines in home prices offer some encouragement for the sector. China’s benchmark lending rate cuts this week should help ease mortgage costs and support buyer sentiment. But the broader forces reshaping China’s housing market, and a younger generation increasingly unwilling to take on the burden of home ownership, signal the start of a fundamental reordering of where value lies in the economy.
