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22 Jan 2025
3 min read

Is Chinese property troughing?

We believe it could be hard for the Chinese economy to reflate without a rebound or at least a trough in the Chinese property market.

Chinese housing

With exports facing tariff headwinds and infrastructure needs largely met, it appears that any rebound in the Chinese economy will have to rely on consumption. And since property constitutes the lion’s share of households’ wealth, we believe a stabilisation in house values is needed for firmer consumption.

We have argued in the past that two factors are perpetuating the housing downturn. One is the large housing overhang, as evidenced by the excessive number of houses under construction and by high vacancy rates of completed houses. The other is a lack of demand as households no longer believe that houses that are mostly bought off-plan will ever be delivered by struggling developers.

Let’s look at these two drivers in turn.

China’s ongoing housing overhang

There is no current data on vacancy rates, but data on houses under construction suggests that oversupply is still an issue. China needs about 1 billion sqm of new (urban) housing per year owing to migration and depreciation.

As it takes around three years to build a house, we should observe 3 billion sqm under construction at any point in time. Instead, houses under construction still came to 5 billion sqm at end-2024 – an excess of supply that would take about two years to work off with normal demand.

Demand to recover?

Turning to demand, we see tentative signs of a trough. The data is noisy, but since April of last year, housing sales have moved sideways to slightly up. What is more, this stabilisation extends to houses bought off-plan, suggesting that the crisis of confidence is abating. 

This is surprising in our view, as little progress has been made in delivering pre-sold homes. For want of other explanations, we attribute the improved sentiment to the flurry of policy announcements in autumn, notwithstanding the absence of property support measures.

There is other evidence that the property market is healing. After four years of contraction, property sales are now in line with fundamental demand of 1 billion sqm a year. Similarly, residential investment in per cent of GDP has returned to its long-term level after exceeding it for the past 20 years. Of course, property demand could undershoot after the bust, but the stability in monthly sales makes us hopeful that this can be avoided.

State support on the way?

So, where are we in the property correction? The stabilization of demand is a necessary, but not sufficient condition for a bottom in the property market. In contrast to sales, housing starts are still falling and should continue to do so for another two years unless the government tackles the housing stock.

House prices are also still falling. Local governments are encouraged to buy excess houses using a People’s Bank of China (PBoC) on-lending facility or special purpose bonds. But, with funding costs above rental yields, the program hasn’t made much headway.

The government has repeatedly disappointed in its policy support, particularly, with respect to the property market. However, we detect a new determination since September to overcome deflation and remain hopeful that new measures to address the housing overhang will be unveiled in 2025.

What are the investment implications?

Stabilization in the property market is key for the Chinese economy to reflate. In turn, we believe that reflation is a necessary condition for domestic equity markets to sustainably perform. 

Over the last decade, earnings have halved at the index level for investors in the offshore market. Economic reflation has the potential to stop the rot in corporate earnings, but will it prove sufficient? 

There are plenty of other factors to consider, including noise around Trump’s tariff threats. However, the market trades on single-digit multiples again now that the bounce from last September’s policy announcements has unwound. With the hope of more property measures to come in 2025, Chinese equities are starting to look attractive again in our view.

Market Cycle Property Asset allocation Asia China
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Erik Lueth

Global Emerging Market Economist

Erik identifies investment opportunities across emerging markets. He uses quantitative models, past experience and lots of common sense. Prior to joining LGIM, Erik worked for…

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