The Bottom is Nearing: Why China’s Housing Market Offers a Strategic Investment Opportunity in 2025

The Chinese housing market, once plagued by overcapacity and developer defaults, is now at a pivotal turning point. Government policies targeting liquidity support, inventory management, and mortgage affordability are creating a floor for prices, with tier-1 cities like Shanghai leading the stabilization. While Fitch Ratings warns of lingering risks in lower-tier markets, Goldman Sachs sees 2025 as the year the sector finds its footing. This is a buy-dip opportunity for investors willing to navigate the divide between winners and losers.

Policy-Driven Stabilization: The Three Pillars of Recovery

China’s housing recovery hinges on three coordinated policy initiatives:

1. Whitelist Developer Funding:
   The government’s expansion of credit to credible developers has been critical. By doubling the “whitelist” credit quota to RMB 4 trillion, authorities have prioritized developers with manageable debt and essential projects. This has prevented defaults, stabilized construction activity, and rebuilt buyer confidence. State-owned enterprises (SOEs) now hold 35% of the market, leveraging preferential financing to acquire distressed assets and complete stalled projects.

2. Inventory Absorption:
   Tier-1 cities have slashed housing overhangs to 10–12 months of sales (down from 14–16 months in 2024) through RMB 300 billion in special bonds for affordable housing and government procurement of unsold units. Meanwhile, urban renewal projects—converting underused land into mixed-use developments—are reducing excess supply while catering to demand for modern living spaces.

3. Mortgage Easing:
   With first-home mortgage rates now at 3.8–4.0% (a historic low) and down payments cut to 20%, affordability has improved sharply. In Shanghai, this has driven a 10.1% year-over-year price rise—the strongest growth among tier-1 cities—and fueled a 20-month high in secondary market sales.

Regional Divide: Tier-1 Resilience vs. Lower-Tier Struggles

While tier-1 cities are stabilizing, lower-tier markets remain mired in oversupply.

• Tier-1 Cities (Shanghai, Shenzhen, Beijing):
  These markets are leading the recovery due to robust demand from professionals, policy tailwinds, and limited supply. Shanghai’s secondary market transactions rose 30% year-over-year in Q1 2025, signaling buyer confidence.

• Lower-Tier Cities (Tier-3/4):
  Inventory remains stuck at 18–20 months of sales, with prices still falling 3–5% annually. Fitch Ratings warns that weak population growth and job losses (particularly in export-dependent regions) will prolong the downturn.

Analyst Contrasts: Fitch’s Pessimism vs. Goldman’s Optimism

• Fitch Ratings: Warns of systemic risks, citing 15–20% of developers still facing liquidity issues and persistent overcapacity in weaker cities.
• Goldman Sachs: Argues that policy coordination and tier-1 demand will stabilize prices by mid-2025, with prices appreciating 0–2% nationally by year-end.

The truth lies in the data: tier-1 cities are already outperforming, while lower-tier markets require further policy intervention.

Investment Strategy: Focus on Quality and Urban Renewal

1. Urban Renewal Developers:
   Target firms with strong balance sheets and exposure to tier-1 urban renewal projects. These projects, which repurpose outdated land into mixed-use communities, align with government priorities and offer predictable returns.

2. Rental REITs:
   China’s rental yield gap is closing: tier-1 yields rose to 2.2–2.5%, up from 1.8% in 2023. Institutional rental platforms (e.g., Vanke’s rental-focused arm) offer steady income streams as affordability constraints push renters to delay purchases.

3. Caution on Lower-Tier Exposure:
   Avoid developers and land banks concentrated in tier-3/4 cities. Their inventories remain excessive, and demand is structurally weaker.

The Buy-Dip Case: Act Before Policy Tailwinds Peak

The window to lock in discounted valuations is narrowing. Key catalysts include:
- Further rate cuts: The PBOC may lower rates further in H2 2025 to counter trade tensions, boosting mortgage affordability.
- Urban renewal subsidies: Local governments are accelerating funding for tier-1 projects, reducing execution risks.

Conclusion: The Bottom is Here—Act Now

China’s housing market is not in a boom, but it is no longer in freefall. Tier-1 cities offer a compelling entry point for investors willing to focus on policy beneficiaries: urban renewal developers and rental REITs. While lower-tier risks remain, the government’s commitment to stabilization—backed by data—signals this is the time to buy quality assets at post-crisis lows.

The recovery is uneven, but the opportunity is clear.