China’s housing market struggles: Prices fall at fastest pace in 8 months

China’s real estate market is showing signs of prolonged weakness, as new home prices in June fell at their fastest monthly pace in eight months, according to official data released on July 15. Despite multiple rounds of policy interventions aimed at boosting the sector, the housing downturn continues to exert pressure on the country’s economy, dampening consumer confidence and raising concerns among policymakers about how to revive the market.

Official data from China’s National Bureau of Statistics revealed that new home prices in June fell by 0.3 per cent month-on-month. This came on the heels of a 0.2 per cent drop in May. Year-on-year, prices dropped 3.2 per cent, slightly improving from the 3.5 per cent decrease recorded in May. The sluggish housing market is a major drag on the country’s overall economic recovery, which is being challenged by factors such as geopolitical tensions, a sluggish consumer spending environment, and deflation in the factory sector.

Despite aggressive stimulus measures, including reductions in mortgage rates, easing of homebuying curbs, and efforts to boost construction, the property market’s downward trajectory remains concerning. This is especially critical given the sector’s importance to the Chinese economy. Real estate and related industries have long accounted for about a quarter of China’s GDP. As home prices continue to fall, there are mounting fears that the property sector’s struggles will further dampen consumer demand and hinder broader economic growth.

Policy efforts and limited impact

The Chinese government has implemented several measures to address the ongoing real estate slump. In addition to reducing mortgage rates and down payment requirements, local governments have eased restrictions on homebuying and launched urban redevelopment projects. The government has also made efforts to relieve debt-laden developers by allowing them to sell housing inventories and undeveloped land to local authorities. Despite these efforts, the sector remains in decline, and the government’s ability to counteract the negative effects on the economy is being tested.

Analysts are predicting that more policy support could be announced in the coming months, with some speculating that additional stimulus measures will be rolled out during the July Politburo meeting. The market has shown signs of weakening, prompting concerns about further intervention. However, some economists argue that the Chinese government may choose to hold off on major support measures, in part to preserve policy flexibility amid escalating tensions with the US and the expiration of a temporary trade deal in mid-August.

Real estate slump affects broader economy

The prolonged downturn in the housing market is contributing to a wider slowdown in China’s economy. Falling real estate prices are a significant contributor to the “negative wealth effect,” whereby homeowners see the value of their assets diminish, leading to reduced consumer spending. Real estate wealth accounts for up to 70 per cent of household wealth in China, and as home prices fall, so does consumer confidence.

The impact of the property slump on consumption has been palpable, with retail sales expected to slow in June after a better-than-expected 6.4 per cent growth in May. This growth, however, was largely driven by one-off sales promotions and government subsidies. Meanwhile, policies encouraging a culture of frugality, including bans on alcohol at government meals and stricter rules on work-related travel expenses, have further dampened consumer sentiment. This is adding to concerns that consumption, a crucial pillar of economic growth, may struggle to regain momentum.

The housing market’s struggles are also putting a strain on local governments, which rely heavily on land sales to fund their operations. As property values fall, these land sales have dwindled, creating a fiscal shortfall that has forced local authorities to seek alternative sources of revenue. Many are now looking to tax businesses more aggressively, further squeezing the economy.

Limited bright spots amidst a slump

While the overall market is in decline, there have been a few pockets of growth. Some high-end residential developments in major cities like Beijing, Shanghai, and Hangzhou have seen positive momentum, driven by demand from wealthier buyers looking to upgrade to more prestigious locations. Developers like China Jinmao Holdings have seen their sales rise, capitalising on this niche demand. However, such developments remain limited and cater mainly to high-income buyers, leaving the broader housing market still in a state of stagnation.

The decline in home prices has also driven a sharp drop in the demand for second-hand homes, with values falling by 0.61 per cent in June, marking the steepest drop since September. This suggests that the property sector’s woes are not limited to new homes alone but extend across the market.

Meanwhile, several developers are struggling to complete construction projects, which has exacerbated the issue for homebuyers who purchased properties years ago but have yet to see them delivered. The rise of high-profile defaults by major developers, including Evergrande, has added to the uncertainty in the market and further eroded consumer confidence.

Long road to recovery

Looking ahead, experts predict that the Chinese property market will likely continue to face challenges. Despite efforts to stabilise the market, many analysts believe that prices could fall further, potentially by 20-30 per cent, before the market reaches a bottom. Policymakers will have to remain patient and may need to focus on demand-side measures, such as encouraging public housing projects, to generate some level of stability in the market.

While the government is expected to continue offering some form of stimulus, the scope of any new measures remains uncertain. For now, the real estate slump is one of the most significant challenges facing China’s economy, impacting not just the housing market but also broader consumption, fiscal health, and economic growth.

(With inputs from agencies)