The extensive correction in the Chinese real estate market continues to negatively impact both the housing price trends and the development activity, while the widely anticipated effect of new government support measures is yet to materialize fully.

This extended overview from the Global Property Guide covers key aspects of the Chinese housing market and takes a closer look at its most recent developments and long-term trends.

Table of Contents:

• Housing Market Snapshot
• Historic Perspective
• Demand Highlights
• Supply Highlights
• Rental Market
• Mortgage Market
• Socio-Economic Context

Housing Market Snapshot

Residential property prices in major Chinese cities continue to decline amidst the protracted property crisis. According to the National Bureau of Statistics of China (NBS), the Sales Price Index for Newly Constructed Commercial Residential Buildings in 70 large and medium-sized cities fell by 3.36% year-on-year as of July 2024 (a decrease of 3.82% when adjusted for inflation).

Data Sources: NBS, Bank for International Settlements, Global Property Guide.

The decline in the Second-Hand Residential Buildings Index was even more significant, showing a year-on-year drop of 7.00% (7.45% inflation-adjusted). "As more people are looking to sell their flats, leading to an increased supply of second-hand properties, there is greater room for negotiation," said Andy Lee, chief executive for mainland China at Centaline, as quoted by The Financial Times. Notably, prices of second-hand homes are generally seen as a more accurate indicator of market dynamics in China, as new home prices tend to be less volatile due to the price guidance often set by local governments - a practice that is gradually being relaxed.

Note: Nominal price year-on-year change for 70 large and medium-sized cities as reported by the NBS.
Data Source: NBS, Bank for International Settlements, Global Property Guide.

Sales Price Index by City Tier:

According to the data from the house price information platform hosted by the China Real Estate Association, the nationwide median house price in August 2024 reached RMB 1.2 million (USD 169 thousand), declining 7.69% year-on-year.

Average house prices in Tier-1 cities:

A Reuters poll conducted between August 26-29 involving 10 analysts indicated that home prices are expected to decline by 8.5% in 2024, compared to a previously forecasted 5.0% drop from the May survey. For 2025, prices are projected to decrease by 3.9%, consistent with the forecast made in May.

"The actual source of funding for property developers has shrunk more seriously, affecting the release of housing demand," stated Ma Hong, senior analyst at GDDCE Research Institution, as quoted by Reuters. Ma added, "My house price forecasts have been revised down from May, as cash flow pressures on some big real estate companies will continue to mount, widening risk exposure and putting pressure on confidence in the property market."

Historic Perspective

China's Property Bubble: The Crisis, Government Action, and Future Prospects

China's current property crisis stems from the central role of real estate in its economy, which drove rapid growth and contributed about 20% of economic activity. For a decade before the pandemic, housing prices surged relative to household incomes, partly because consumers, facing limited attractive savings options, increasingly invested in property. This fueled heavy borrowing by developers, while local governments became dependent on land sales for revenue.

In 2020, to address concerns about the overheating market, the Chinese authorities introduced the "Three Red Lines" policy aimed at curbing speculative behavior and excessive corporate debt. The policy imposed strict limits on developers' leverage and liquidity, while banks were restricted from lending to these firms. This credit squeeze then contributed to the collapse of overleveraged developers.

The consecutive fall of China Evergrande Group in 2021, with over USD 300 billion in liabilities, exposed the sector's vulnerability. The crisis quickly spread to other developers, such as Sunac China and Fantasia Holdings, leading to a wave of defaults. As property sales plummeted, many developers who relied on pre-sales to finance construction struggled to finish projects. In response, numerous homebuyers launched a "mortgage boycott", refusing to make payments on unfinished apartments.

Real estate activity has since sharply contracted. By 2023, housing starts had dropped by more than 60% from pre-pandemic levels, marking one of the largest housing busts globally in decades. This decline was exacerbated by homebuyers' concerns about developers' financial health and uncertain property prices, with demand reaching a 13-year low.

The government has since taken significant steps to stabilize the market. It expanded affordable housing and urban redevelopment programs, injecting RMB 500 billion (USD 70 billion) through the People's Bank of China's (PBOC) Pledged Supplementary Lending (PSL). A cross-agency mechanism was created to finance unfinished projects, with RMB 935 billion (USD 131 billion) in loans approved by May 2024. Additional measures included easing home purchase restrictions, lowering mortgage rates, and providing forbearance to struggling developers.

In May 2024, the authorities introduced further policies, including expanding a PBOC facility to assist state-owned enterprises in acquiring completed housing for affordable housing conversion, reducing mortgage down payments, and extending forbearance for developers. The government remains confident these actions will stabilize the market, focusing on resolving unfinished presold housing and managing the inventory overhang.

New Directives introduced in May-June 2024:

At the same time, expert opinions remain mixed. The International Monetary Fund (IMF) warns of continued uncertainty, noting that some policies could delay the sector's recovery and raise future costs. That said, their latest assessment also highlights the potential benefits of measures like purchasing existing inventories for affordable housing, which could help reduce the inventory overhang. The "whitelist" mechanism offers promise for addressing unfinished presold projects, though challenges persist with distressed developers and non-viable projects. While homebuyer confidence remains fragile and price adjustments are limited, analysts note that the full impact of these government measures is still unfolding, and the ultimate path of market adjustment has yet to be determined.

Residential market dynamic (inventory, started and completed housing units, area of new housing units sold):

Data Source: NBS.

Demand Highlights:

Shift of Focus from Presold to Completed and Second-Hand Homes

As homebuyer confidence deteriorated, the total floor area of new home sales in China has steadily declined in recent years, hitting a 13-year low of 948.0 million square meters by December 2023, as reported by NBS, representing a 17.30% decrease compared to December 2022 and only 60% of the peak level recorded in 2021.

The dip worsened in 2024, with the total area of new residential units sold in the first eight months dropping 20.37% year-on-year compared to the same period in 2023, underscoring the persistent weakness in the market activity. Morningstar reports that homebuying sentiment remained subdued in Q2 2024 but expects a gradual recovery as purchasing restrictions continue to ease.

Fitch Ratings projects that new housing demand in 2024 will range between 850 million and 900 million square meters. Beyond the current market turbulence, structural factors such as slower urbanization, an aging population, and economic restructuring are expected to drive a long-term decline in new housing demand, with an estimated 20% reduction annually to an average of around 800 million square meters.

Data Source: NBS.

While off-plan (presold) homes still make up the majority of new residential sales, their share has significantly declined. By August 2024, presold units accounted for 74% of total sales, down from approximately 83% the previous year, as concerns over developers' financial stability have led buyers to prefer completed properties.

Reflecting this trend, the sold area of off-plan units fell by 29.09% year-on-year in August 2024, while the completed new units showed positive dynamics, demonstrating a 20.99% annual growth. Local government purchases of completed units for conversion into affordable housing have helped absorb excess inventory in this segment. Morningstar analysts noted, "Looking ahead to the coming quarters, we expect sales growth of completed new projects to continue outstripping that of presold units, driving an ongoing shift in the sales mix."

Another notable trend indicating the market's transition is the increasing demand for second-hand housing, marking a shift after decades of dominance by new-build units. "The primary market is really shrinking [in terms of] both supply and demand," said Zerlina Zeng, head of Asian corporates at CreditSights, in a statement to The Financial Times. "I think going forward, you will see more vibrant activity coming from the secondary market."

In 2023, for the first time since the emergence of private property markets in 1990, the total floor area of second-hand home sales in 30 major Chinese cities surpassed that of new homes, according to data from China Real Estate Information Corp cited by Financial Times.

Data Source: China Real Estate Information Corp via The Financial Times.

"The over 20% year-on-year increase in existing home sales in top cities for June 2024 gives us confidence that previous policy easing has had a positive impact. As more buyers favor existing units, we are optimistic about a sustained rebound in secondary home transactions in the coming quarters," Morningstar analysts stated.

Supply Highlights:

New Housing Starts Fall Amidst Unsold Inventory Build-Up

In 2023, the total area of residential projects started in China declined by 21.39% year-on-year, reaching 692.9 million square meters, as reported by the NBS. This decrease was primarily driven by weaker demand and constrained land acquisitions. In contrast, the total area of completed residential units grew by 15.82% year-on-year to 724.3 million square meters, spurred by government initiatives aimed at ensuring the delivery of pre-sold units. Notably, for the first time on record, the area of completed residential units surpassed that of newly started projects.

Data Source: NBS.

The downward trend in construction continued into 2024. As of August, the total area of residential units had dropped 23.00% year-on-year, while completions also decreased by 23.23%. Morningstar analysts predict a sequential rise in completions in the coming quarters, supported by government efforts to safeguard project delivery. However, a sharper year-on-year decline in new home starts is expected for 2024, as land supply remains constrained by high housing inventories.

The area of unsold residential units has surged by over 70% since 2020, raising significant concerns about developer bankruptcies and broader economic fallout. "At the moment, it may seem like the inability to sell homes is the primary issue, but the real threat lies in more developers going bankrupt," said Dan Wang, Chief Economist at Hang Seng Bank, quoted by The New York Times.

The NBS reported that the residential housing inventory (represented by residential areas available for sale) in 2023 grew by 22.90%, up from 18.39% the previous year. By August 2024, this figure had risen to 381 million square meters, reflecting a 21.5% year-on-year increase. Early signs of a slowdown in inventory growth reflect the effects of local government's efforts to absorb idle properties, supported by loan schemes to convert unsold homes into affordable housing.

Data Source: NBS.

Looking ahead, Morningstar analysts highlight: "We expect inventory absorption to accelerate over time, driven by local authorities' push for affordable housing conversions and increased discounts. Inventory clearance in Tier 1 and Tier 2 cities has been faster than in lower-tier cities, a trend we anticipate will continue. While new construction starts may remain sluggish, completions should improve with enhanced liquidity support."

Rental Market:

Rental Sector Seen as Promising by Government and Investors

Amid the ongoing transformation of the property market in China, the housing rental sector is seen by the authorities as one of the key development directions, especially in terms of activating the existing housing stock. "We should fully motivate market institutions and mobilize more social funds to establish a sustainable business model, so as to support the de-stocking of existing commodity housing and to facilitate the transition and development of the real estate sector," said the PBOC in their latest monetary policy report.

The already implemented government incentives aiming to support the sector and encourage rental housing developers include tax benefits, a dedicated supply of land for rental housing projects, and increased credit availability.

To highlight the significant potential for the sector, the PBOC cites market estimates that over 200 million people in China will require rental housing in the future. On the demand side, the growing importance of such tenant groups as new urban residents and young professionals - fresh graduates who have just started working - is noted. On the supply side, the rental market is seen as gradually shifting from individual private landlords to institutional leasing, as housing rentals become more sustainable commercially.

According to the estimations of some market institutions, cited by the PBOC, the current housing rent-to-price ratio has already approached 2% in first-tier cities and is around 3% in second-and third-tier cities. "During the past decade, the annual growth rate of the rent component in China's Consumer Price Index (CPI) has exceeded 1.2 percent. If this growth rate can be maintained over the long term, the total return on rental housing, compared to fixed home purchase costs, is likely to increase to over 3 percent," said the central bank.

While rent growth in China has generally slowed since the pandemic, with the nationwide CPI for rental housing showing actual year-on-year decline or only marginal growth in the last three years to date, the PBOC expects the rents to steadily rise over the long term, as the economy recovers.

Global industry players share this view of residential rentals as a promising sector for the Chinese market. In their 2024 China Real Estate Outlook, Savills expects an average 4% rental return in the residential leasing market, saying that the "continual influx of labor to economically dynamic regions will sustain robust, long-term demand for the residential rental market." Beyond economic migrants, such consumer groups as students, couples, families, and the elderly are expected to contribute to the demand for rental properties, creating opportunities for developers, investors, and property operators.

"A combination of shifting demographics, social acceptance of renting as a long-term alternative to home ownership and the introduction of rental housing REITs as a potential path to liquidity, make investment in Chinese multi-family properties a priority target" for foreign and domestic institutional investors, concluded a panel of experts from LaSalle Investment Management, Greystar, and Savills at the Mingtiandi 2024 APAC Residential Forum earlier this year.

According to the data from the house price information platform hosted by the China Real Estate Association, nationwide median rent in August 2024 was RMB 1,830 (USD 257) / month (1.6% down year-on-year). Conditions varied significantly across the submarkets, the most expensive cities being Beijing, Shanghai, Shenzhen, Hangzhou, and Guangzhou.

Average rent levels in selected cities:

Mortgage Market:

Lower Borrowing Costs Expected to Encourage Buyers

After a period of rapid expansion (on average, 19% annually between 2013 and 2021), the growth in the balance of personal housing loans maintained by China's financial institutions has slowed significantly since early 2022 and at the end of 2023 demonstrated an actual year-on-year decline of 1.6%. The trend continued into 2024 with a year-on-year decrease of 1.9% in Q1 and 2.1% in Q2. Represented as a percent of GDP, the stock dropped from 34% in 2020 to 30.3% in 2023. At the end of Q2 2024, the total value of outstanding housing loans to households reported by the PBOC stood at RMB 37.79 trillion (USD 5.22 trillion).

Data Sources: PBOC, NBS.

At the end of September 2024, aiming to support the economy, the PBOC unveiled a series of upcoming new policy measures, including cutting the reserve requirement ratio, lowering interest rates on existing home loans, and unifying the minimum down payment ratio for mortgages.

The PBOC's reserve requirement ratio, which determines the amount of cash banks must hold as reserves, will be reduced by 0.5 points, freeing up liquidity of about RMB 1 trillion (USD 138 billion) into the market for lending, with a further reduction of 0.25-0.5 possible later in the year, depending on market conditions.

The central bank will also guide commercial banks to reduce their interest rates on existing mortgages closer to the interest rates on newly issued loans, with an average reduction of about 0.5 points. Minimum down payment for second mortgage loans will be brought down at the national level from the current 25% to 15%, on par with mortgages for first-time buyers.

"We estimate that this policy [interest rate reduction] will benefit 50 million households and 150 million people, reducing the total interest expenses of households by approximately RMB 150 billion per year, on average. This will help promote the expansion of consumption and investment <…> and maintain the stable and healthy development of the real estate market," said Pan Gongsheng, Governor of the PBOC.

Data Sources: PBOC, China Foreign Exchange Trade System (CFETS).

Earlier in the year, the central bank also removed nationwide mortgage interest rate floors, which led to a fall in average mortgage rates across China. The PBOC commented on the policy shift in the Q2 2024 China Monetary Policy Report: "The vast majority of cities have canceled the local mortgage rate floors for first-home and second-home buyers, which means that financial institutions may independently determine the interest rates on personal mortgage loans granted to their clients. All commercial loan rates are now liberalized, and financial institutions are able to independently set the deposit and loan rates according to their operational needs, and to maintain a reasonable spread between loans and deposits."

China's main lending benchmark, the loan prime rate (LPR), based on 20 quoting banks' actual loan rates granted to their best clients, has been on a downward trajectory and was most recently reduced in July 2024 by 0.1 points for both one-year LPR (from 3.45% to 3.35%) and over-five-year LPR (from 3.95% to 3.85%) but has remained unchanged since.

The weighted average interest rate on new mortgages, reported by the PBOC on a quarterly basis, was most recently recorded at 3.45% in June 2024, 0.66 points down from a year ago and 1.17 points down from two years ago. As of August 2024, existing mortgages in China carried an average interest rate of about 4%, according to the China Real Estate Information Corp (CRIC) data cited by Reuters.

In their China Real Estate Market Pulse for Q3 2024, Morningstar anticipates these recent changes to move housing demand, as new policies take effect: "We expect corresponding mortgage cost reductions by banks to boost home purchases."

Socio-Economic Context:

Property Market Correction Continues to Contribute to Economic Slowdown

After four decades of high growth and remarkable economic achievements, China's growth has decelerated in recent years, reflecting the pandemic, property market correction, and structural headwinds such as weakening productivity and labor force growth. After a modest 3% expansion in 2022, the country's real GDP growth picked up somewhat, reaching 5.2% in 2023, however, the IMF projects the indicator to moderate to 5% in 2024 and 4.5% in 2025, dropping below 4% from 2027.

The latest IMF Staff Country Report sees this transition to lower growth as consistent with China's authorities' goal to pursue high-quality growth and reduce the imbalances and vulnerabilities that have emerged, most notably with the significant build-up of debt. According to the IMF figures, the country's general government gross debt ballooned from 37% of GDP in 2013 to 83.6% of GDP in 2023 and is forecast to keep expanding in the future.

At the same time, Consumer Price Index (CPI) inflation in China has dropped from 2% in 2022 to just 0.2% in 2023 and even went into negative territory from October 2023 to January 2024, pushed by the continued economic slack and lower food and commodity prices. However, later in the year, the indicator picked up, most recently reported by the NBS at 0.6% in August 2024. The IMF projects further moderate acceleration of consumer price growth, with headline inflation reaching 0.7% in 2024 and 1.9% in 2025.

Data Source: IMF.

Against the backdrop of the general economic slowdown, China's labor market is experiencing certain constraints as well. While the overall urban surveyed unemployment rate published by the NBS eased modestly from a 6.1% peak in April 2022 to the most recently reported 5.3% in August 2024, the indicator remains much more elevated for the younger population groups. In August, urban surveyed unemployment reached 6.9% for the 25-29 age group (excluding students) and 18.8% for the 16-24 age group (excluding students).

In their latest assessment, the IMF staff noted: "Other labor market indicators suggest broad-based slack <…> Wage growth remains subdued and data from some private sector surveys and online recruitment platforms suggest declining salaries for new hires."

Data Source: NBS.

Overall, the property sector remains a significant drag on economic activity in China, according to the IMF assessment. A deeper- or longer-than-expected contraction in the sector, combined with high debt levels, remains the country's key domestic risk.

Earlier this year, while affirming its 'A+' standing, Fitch Ratings revised their view of China's outlook, changing it from stable to negative. This shift primarily reflected the country's more uncertain economic prospects amid the ongoing transition away from property-reliant growth to what the government views as a more sustainable model.

At the same time, despite the continued weakness in the property sector, China's large and diversified economy continues to play an integral role in global goods trade and demonstrates relative resilience, with its solid GDP growth compared to some peers' GDP growth.

Sources:

1. National Bureau of Statistics of China (NBS)
   1. National Data: https://data.stats.gov.cn/
   2. Sales Prices of Commercial Residential Buildings in 70 Medium and Large-sized Cities in July 2024: https://www.stats.gov.cn/
   3. Investment in Real Estate Development for Jan-Aug 2024: https://www.stats.gov.cn/
2. People's Bank of China (PBOC)
   1. Monetary Policy Reports: http://www.pbc.gov.cn/
   2. LPR: http://www.pbc.gov.cn/
   3. Statistical Report on the Credit Structure of Financial Institutions (Q2 2024): http://www.pbc.gov.cn/
   4. The State Council Information Office Held a Press Conference to Introduce the Financial Support for High-Quality Economic Development: http://www.pbc.gov.cn/
3. China Foreign Exchange Trade System (CFETS)
   1. LPR Historical Data: https://www.chinamoney.com.cn/
4. China's House Price Information Platform
   1. National Median Rent: https://www.creprice.cn/
   2. National Median Sales Price: https://www.creprice.cn/
5. International Monetary Fund (IMF)
   1. Country Overview: People's Republic of China: https://www.imf.org/
   2. IMF Staff Country Report: https://www.imf.org/
6. Morningstar DBRS
   1. China Real Estate Market Pulse Q3 2024: https://www.morningstar.com/
7. Fitch Ratings
   1. Fitch Revises Outlook on China to Negative; Affirms at 'A+': https://www.fitchratings.com/
   2. China Housing Market Forecast 2024-2040: https://www.fitchratings.com/
8. Federal Reserve Economic Data (FRED)
   1. Currency Conversions: USD for China: https://fred.stlouisfed.org/
9. Savills
   1. 2024 China Real Estate Outlook: https://pdf.savills.asia/
10. Mingtiandi
    1. LaSalle IM, Greystar, Savills See China Rental Housing Primed for Growth: https://www.mingtiandi.com/
11. The Economist
    1. China's Central Bank Tries to Save the Economy: https://www.economist.com/
12. Reuters
    1. China Central Bank Cuts Medium-Term Loan Rate: https://www.reuters.com/
    2. China Mortgage Cut is Start of Confidence Rebuild: https://www.reuters.com/
    3. China's Home Price Outlook for 2024, 2025 Worsens: https://www.reuters.com/
13. The Financial Times
    1. Chinese Homebuyers Favour 'Second-Hand' Houses as Property Crisis Bites: https://www.ft.com/
14. The New York Times
    1. China Has a Plan for Its Housing Crisis. Here's Why It's Not Enough: https://www.nytimes.com/
15. China Global Television Network (CGTN)
    1. China to Cut Bank Reserve Rates By 0.5 Percentage Points, Lower Mortgage Rates on Existing Home Loans: https://news.cgtn.com/
    2. China Mortgage Cut is Start of Confidence Rebuild: https://www.reuters.com/