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The author is Founder and Managing Partner of Plenum.
China’s real estate slump is entering its third year, leaving many investors wondering when it will bottom out. By many measures, we have witnessed the biggest housing market correction in economic history.
The decline in home sales and construction activity has been significant: For the 12th consecutive month, by my calculations using official statistics, new home sales in China have fallen to 850 million square meters, or about 8.5 million apartments, half the level of three years ago.
Floor space starts fell to 620 million square metres, down two-thirds from the peak in early 2021. Real estate and construction activity as a share of GDP will shrink to 12.9% in 2023 from 15.2% in 2020, the lowest level since 2009.
The price declines have been less dramatic: On average, prices have fallen about 20% across China over the past three years, according to official and third-party data. But regional disparities are stark: In some cities, prices peaked much earlier than 2021, falling by more than half. Some housing estates have seen their value fall by more than 75%, according to real estate agents.
Both cyclical and structural factors caused the correction. Cyclical reasons are often cited, with a common view that it was caused by Beijing’s “three red lines” – policies limiting leverage in the real estate sector. This was important, but its importance has been overstated. In any case, Beijing’s policy stance shifted from cyclical tightening to easing by late 2022. Following recent moves, housing policy is now the loosest on record in most parts of China.
But markets are still falling. Markets are divided on why Beijing’s monetary easing didn’t work this time. Common reasons cited include post-COVID trauma, declining consumer confidence, and policy shifts that were too slow and gradual. These are plausible arguments, but structural factors are the bigger force behind the current correction than cyclical ones.
Two fundamental reasons have driven China’s housing demand over the past three decades: more people living in cities, and more people living in larger apartments. The number of urban residents grew by an average of 22 million per year from 1995 to 2020, and the urbanization rate soared from 29% to 64%. During this period, urban living space per person more than doubled to 39 square meters.
Living space per capita and urbanization rates will probably continue to increase, but not as rapidly as they have in the past, given that current levels are much higher. This means that the annual demand for new housing will decrease.
The pace of urbanization is already slowing: the average annual increase in urban population from 2021 to 2023 will be 10 million people, less than half of the rate of the past 25 years. Even the slowdown in urbanization will reduce demand for new housing from about 900 million square meters per year to about 400 million square meters. The expansion of living space is also very important: every additional 0.1 square meter of living space per capita creates a demand for 90 million square meters of new housing, so even a small slowdown in growth can have a big impact.
The final question is when China’s housing market will hit bottom. A better-case scenario is that sales will start to stabilize near the end of the year. The property market is on track to continue its correction by then. New home sales will likely fall to 800 million square meters and new construction will likely fall to 500 million square meters per year, down 75% from its peak.
These corrections are quite large in the history of global real estate market downturns, and it would be reasonable to argue that they may be enough to reverse the market or may represent an overcorrection.
China’s urbanization will still generate an annual demand for more than 400 million square meters of new housing. If living space increases by 0.4-0.5 square meters per year, half the annual growth rate of the past 20 years, it will generate an additional 400 million square meters of new housing demand per year, and the total demand for new housing will be 800 million square meters. If the housing market stabilizes, China’s economy will be on a stronger footing next year. It can even be said that Beijing has achieved a victory in the restructuring of the economy.
But of course, none of this is guaranteed, since this is all based on the assumption that living space per capita and urbanization will continue to grow at a moderate pace. The most pessimistic case is that there will be much less increase or no increase at all, meaning the market will not stabilize by the end of the year and will continue to search for a bottom in 2025.
