China’s significant decline in new housing construction is sparking hopes that the property sector, long plagued by oversupply, may be finding its footing. However, without a comprehensive cleanup of bad assets, concerns about a Japan-like stagnation remain.
Currently, China’s real estate situation mirrors that of the U.S. and Spain during their late 2000s property crises. With new housing construction less than half its 2021 peak, analysts predict that home-building activity could stabilize within a year, potentially alleviating some pressure on China’s economic growth.
“It’s reasonable to expect that construction will stabilize soon,” said Logan Wright, a partner at Rhodium Group. New home starts in China dropped 63% from their peak to 634 million square meters in the 12 months through April. The International Monetary Fund (IMF) estimates that the fundamental demand for housing in China will average 950 million square meters annually over the next decade. Given China’s substantial existing inventory, the IMF projects new housing starts to average 715 million square meters—just above current levels.
This scenario suggests that the steep declines in real estate investment, which JPMorgan estimates have reduced China’s economic growth by 1.5 percentage points each year for the past two years, may be nearing an end. Oxford University’s George Magnus believes a cyclical rebound in the property sector could happen by 2025 or sooner.
Following Japan’s Footsteps
Future property investment in China is likely to focus more on affluent coastal areas. For instance, Shanghai and four of China’s wealthiest provinces—Zhejiang, Jiangsu, Guangdong, and Shandong—accounted for 49% of investment from January to April, up from 39% five years ago.
However, this positive outlook is where favorable comparisons with 1990s Japan end. Wright predicts the property sector, once about a quarter of China’s economy, will stabilize at 40-50% of its peak levels and will not return as a significant growth driver. Home prices in China have fallen 11%, and JPMorgan estimates similar declines for older apartments.
In contrast, the U.S. and Spain saw a 30-40% drop in home prices over more than five years. Japan experienced an 18-year correction with a 47% price drop. China’s current trajectory mirrors Japan’s slow pace, and analysts believe this trend will persist.
Protracted Adjustment
China, like Japan, has not yet fully recognized its losses. Japan’s response included banks purchasing land to stabilize prices. Similarly, China limits how much developers can lower prices and provides incremental support measures. JPMorgan analysts suggest this strategy aims to mitigate financial spillover risks.
China’s unsold homes, nearly double the size of London, remain on the balance sheets of financially strained developers, whose debts are held by banks and other institutions. Unlike the U.S., which used 5% of GDP to absorb toxic assets, or Spain, which created a bad bank, China is reluctant to implement sweeping bailouts.
A policy adviser, speaking anonymously, indicated that the government aims to stabilize the property market rather than prop it up. Recently, China introduced a support package that includes cutting mortgage rates and downpayments, and instructing local governments to buy some unsold apartments for affordable housing. However, these measures may simply transfer bad assets to local governments, delaying the inevitable write-downs.
Alicia Garcia-Herrero, Asia Pacific chief economist at Natixis, believes local governments may eventually face the same fate as Japanese banks, requiring recapitalization. “There hasn’t been a clean-up,” she said. “This is why China looks more like Japan and not like the U.S. or Spain.” Garcia-Herrero does not foresee a significant rise in China’s average housing prices, except perhaps in Tier 1 cities like Beijing, Shanghai, Shenzhen, and Guangzhou.
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