China's Home Prices to Drop Further, Recovery Not Expected Until 2026

China's real estate market, once a major driver of economic growth, is now facing significant headwinds. After three years of sustained decline, house prices in some third- and fourth-tier cities have fallen by more than 40% since August 2021. The government has implemented various measures to stabilize the market and reduce inventory, including buying surplus properties for affordable housing, supported by 300 billion yuan ($42 billion). However, these efforts have had limited success, with the overall price drop standing at 17.9% as of August 2023.



The fall in Chinese property prices is a normal and expected adjustment in the broader economic development process, similar to trends seen in global markets. However, the magnitude and duration of the decline have raised concerns about the market's stability and the potential impact on the broader economy. Experts, such as Yang Fan, head of China and Hong Kong research at the investment group CLSA, have compared the situation to trends seen in "catch-up" economies such as South Korea, Brazil, and Japan, where rapid growth is followed by significant market corrections.

Despite falling housing prices, urbanization and service consumption (e.g., tourism and culture) are expected to grow, mirroring trends in South Korea, Brazil, and Japan. However, the real estate sector's contribution to GDP has been declining, accounting for 5.4% in mid-2024, down from 25% in 2012. The area of unsold commercial housing reached 739 million square meters in July 2024, a 14.5% increase from a year ago, further exacerbating the supply glut and putting downward pressure on prices.



The government has introduced policies to address the supply glut and support the property market's stability. The People's Bank of China (PBOC) has set up a RMB 300 billion relending facility to purchase existing inventories for social housing, which is expected to reduce the overall completed housing stock by 4%-6%. Additionally, the government has announced a new policy on urban village redevelopment and dilapidated housing, which has the potential to reduce the overall completed housing stock by an estimated 9%-11% if implemented effectively.

However, these measures may not be enough to reverse the ongoing decline in house prices. Experts predict that the market will continue to face challenges, with the recovery not expected until 2026. The confluence of factors, such as a mismatch in supply and demand, over-leveraged developer balance sheets, a slump in demand for commercial real estate, rising interest rates in the US and Europe, and lower than expected economic growth, has resulted in a wave of distress across the sector. More than two-thirds of China's 50 largest property developers by dollar bond issuance had defaulted on their offshore debt payments by Autumn 2023, according to Bloomberg.



In conclusion, China's real estate market is expected to face further declines in house prices, with a recovery not anticipated until 2026. The government's efforts to stabilize the market and reduce inventory have had limited success, and the market continues to face significant challenges. Developers' liquidity buffers play a crucial role in the market's recovery, and strengthening these buffers can help prevent a further deterioration in sales and creditworthiness. However, the road to recovery is likely to be long and fraught with obstacles, as the market grapples with structural changes and the impact of global economic trends.