China's Housing Market Downturn and Policy Paradox: Can Stimulus Revive a Languishing Sector?

China's housing market, a cornerstone of its economy for decades, is now at a crossroads. In Q3 2025, real estate development investment fell by 13.9% year-on-year, while sales of newly built commercial housing dropped 7.9% in value and 5.5% in floor area, according to China Briefing's Q3 2025 indicators. Home prices in major cities have plummeted as much as 40% from 2021 peaks, eroding household confidence and consumer spending (Understanding China's Key Economy Indicators for Q3 2025). Despite a flurry of government stimulus measures-ranging from relaxed purchase restrictions to adjusted loan rates-the sector remains mired in stagnation. This analysis explores the sectoral risks and global investment implications of China's property slump, focusing on construction materials, steel, and equity portfolios, while dissecting the policy paradoxes complicating recovery.

A Sector in Freefall: Construction Materials and Steel Under Pressure

The property downturn has cascading effects on upstream industries. China's construction materials sector, particularly steel, is bearing the brunt. The property sector accounts for 26% of China's total steel consumption, and with new home sales by 100 major developers down 16.9% year-on-year in April 2025, steel demand is projected to fall by 8% in 2025 to 219 million metric tons, according to S&P Global Commodity Insights. Rebar prices have already averaged ¥3,206/mt in 2025, a 13.5% decline from the previous year (China's property woes persist, haunting steel markets).

The government's attempts to stabilize the market-such as easing monetary policy and reducing local government debt-have proven insufficient. S&P Global Ratings forecasts a further 6.9% drop in steel demand in 2026, with iron ore markets facing a surplus in the second half of 2025 (China's property woes persist, haunting steel markets). These trends underscore a critical risk for global equity portfolios: as China's property market shrinks, steel producers worldwide face reduced demand, overcapacity, and margin compression.

Policy Paradoxes: Stimulus That Fails to Ignite Demand

The Chinese government's approach to stabilizing the housing market reflects a paradox. While it has adopted "more proactive" macroeconomic policies, including interest rate cuts and relaxed home-buying restrictions, these measures lack the fiscal muscle needed to revive demand, as Xi urged more proactive macroeconomic policies. For instance, localized easing in high-tier cities has done little to offset the broader slump in lower-tier markets, where construction activity remains weak (China's property woes persist, haunting steel markets).

Edward Chan of S&P Global Ratings highlights the contradiction: "The government acknowledges the unresolved nature of the real estate slump but has yet to commit to large-scale fiscal stimulus," he notes. This hesitation stems from a balancing act-avoiding over-leveraging while meeting a 5% growth target. The result is a policy stalemate: developers struggle to secure financing, buyers remain hesitant, and local governments face weaker fiscal revenues (Understanding China's Key Economy Indicators for Q3 2025).

Global Equity Portfolios: Navigating a Polarized Market

The implications for global real estate and equity portfolios are profound. China's property downturn has weakened domestic demand, dragging down sectors like construction materials and steel, which are now grappling with overcapacity and falling prices (China's property woes persist, haunting steel markets). For investors, the challenge lies in navigating a polarized market where traditional growth drivers are faltering.

One adaptive strategy is evident in India's real estate sector, where, according to a report, co-investments surged sixfold to USD 727 million in Q3 2025. This collaborative model mitigates risks by leveraging local expertise while sharing capital burdens-a tactic global investors might emulate in emerging markets less tied to China's property cycle.

However, direct foreign investment in real estate has declined sharply, with institutional investments rising only through co-ownership structures (Foreign, local co-investments in real estate surge over sixfold to $727 mn in last three months: Report). This shift signals a broader trend: investors are prioritizing resilience over growth, favoring diversified, low-volatility assets over speculative bets in overexposed sectors.

Conclusion: A Sector in Transition

China's housing market is undergoing a painful transformation. While the government's stimulus measures have yet to reverse the downturn, the sector's long-term trajectory points toward a smaller but potentially more resilient real estate industry. For global investors, the key lies in hedging against sectoral risks-particularly in construction materials and steel-while exploring alternative markets where co-investment models and policy clarity offer better returns.

As S&P Global Ratings warns, "The property sector's challenges will likely persist into 2026, with primary home prices projected to decline by 1.5–2.5%" (China's property slump this year looks worse than expected). In this environment, agility and diversification will be paramount for portfolios seeking to weather the storm.