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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is founder and managing partner of Plenum
China’s real estate recession is three years old, and many investors are wondering when it will bottom out. By many measures, we have witnessed one of the greatest housing market corrections in economic history.
The decline in housing sales and construction activities is sharp. On a rolling 12-month basis, China’s new home sales have fallen to 850mn square metres, or roughly 8.5mn apartment units, according to my calculations using official statistics. That is half the level of three years ago.
The floor space of construction starts has fallen to 620mn sq m, two-thirds below the peak in early 2021. The share of real estate and construction activities has shrunk to 12.9 per cent of GDP in 2023, the lowest since 2009, from 15.2 per cent in 2020.
The decline in prices is less dramatic. On average, prices have come down by about 20 per cent across China over the past three years, according to official and third-party data. But regional disparity is stark. Some cities saw prices peak much earlier than 2021 and they have declined by more than half. Some residential compounds have lost more than 75 per cent of their value, according to real estate agents.
Both cyclical and structural factors caused the corrections. Cyclical reasons are often cited, and a popular view is to blame Beijing’s “three red lines”, the policy to restrict leverage in the real estate sector. It mattered, but the importance was over-exaggerated. In any case, Beijing’s policy stance has shifted from cyclical tightening to easing no later than late 2022. After the most recent move, housing policies are now at the loosest of all time in most parts of China.
Yet, the market is still down. Markets are split on why Beijing’s easing has not worked this time. Often cited reasons include the post-Covid trauma, a decline in consumer confidence, and a policy shift too slow and gradual. These are plausible points, but structural factors are bigger forces behind the current correction than the cyclical ones.
Two fundamental reasons were driving China’s housing demand over the past three decades: more people living in cities, and people having bigger apartments. The number of urban residents increased on average by 22mn a year from 1995 to 2020, with the urbanisation rate surging from 29 per cent to 64 per cent. Living space per person in urban areas has more than doubled to 39 sq m during this period.
Both living space per person and urbanisation rate will probably continue to progress. However, they will be unlikely to grow as fast as they did, given the much higher levels today. This means less demand for new homes per year.
The pace of urbanisation has already slowed. The average annual increase of urban population was 10mn in 2021-23, less than half the levels from the previous 25 years. The slower pace of urbanisation alone means that demand for new homes falls to about 400mn sq m a year, from nearly 900mn sq m. The growth of living space also matters greatly. Every 0.1 square metre increase in living space per person would create new home demand of 90mn sq m, so some slight slower growth could have a big impact.
The ultimate question is when China’s housing market will finally bottom out. The better-case scenario is that sales start to stabilise near the end of the year. The real estate market is on track to extend its correction by then. New home sales will probably fall to just 800mn sq m, construction of new space will probably fall to 500mn sq m annualised, down 75 per cent from peak.
These corrections would be quite large in the history of global real estate downturns, and it would be reasonable to argue that they may be enough for the market to turn around or may even represent an overcorrection.
China’s urbanisation will still generate demand of more than 400mn sq m of new homes a year. As long as living space rises by 0.4-0.5 sq m a year, which was half of the annual rate of increase in the past two decades, it will generate another 400mn sq m of new home demand a year, and total new home demand will be 800mn sq m. If the housing stabilisation happens, the Chinese economy will be on a much stronger footing next year. Beijing can even claim victory in the structural transformation of the economy.
But none of this is guaranteed, of course, because it is all based on the assumption that living space per person and urbanisation will continue to grow at a moderate rate. The most bearish case is that the increases will be much less, or even not at all. That means the market will not stabilise by year’s end, and it will continue to search for the bottom in 2025.
