China’s massive housing reform is far from over

FT’s scribbler Roula Khalaf selects her favorite stories in this weekly publication.

The essayist is the founder and managing partner of Plenum.

China’s real estate recession is three years old, and many investors are wondering when this recession will end. By many measures, we have seen possibly the largest housing market recovery in economic history.

The decline in housing sales and development activities is well underway. According to my calculations based on the use of authentic data, on a 12-month basis, China’s unused home sales have fallen to 850 million square meters, or more or less 8.5 million rental units. This is part of the last three year period.

The land area of ​​development has fallen to 620 million square metres, two-thirds less than the height at the beginning of 2021. The ratio of real assets and development work has declined to 12.9 percent of GDP in 2023, the lowest since 2009. From 15.2 percent in 2020.

The cost reduction is much less dramatic. According to authentic and third-party data, prices across China have fallen by about 20 percent over the past three years. However, regional disparity is evident. Prices in some cities, which rose a lot before 2021, have fallen by more than half. According to real estate brokers, the price of some residential complexes has fallen by more than 75 percent.

Each of the cyclical and structural components led to improvements. Cyclical reasons are consistently cited, and a common approach is in charge of coverage of Beijing’s “three red lines”, limiting leverage in the real asset sector. It mattered, although its use once became exaggerated. Finally, Beijing’s policy stance has shifted from circular strictures to easing waste disposal by 2022. Following the latest moves, home insurance policies are at an all-time low across much of China.

But, the market still remains sick. The market is confused as to why Beijing’s moderation did not work during this period. Frequently cited reasons include post-Covid shock, lack of customer confidence, and very slow and slow turnaround in coverage. Those are credible issues, although structural components are larger forces behind stream improvement than cyclical ones.

China’s housing demand over the past three decades has been driven by two primary factors: additional families living in towns, and families owning larger housing units. From 1995 to 2020, the number of citizens of the city increased to more than 22 million, with the urbanization rate increasing from 29 percent to 64 percent. During this period, per capita living space in urban areas has more than doubled to 39 square metres.

The length of each residence will almost certainly vary depending on the individual and urbanization rate. On the other hand, given the much higher altitudes these days, they would be unlikely to evolve as rapidly as they did. This implies less demand for unused assets over time.

The process of urbanization has already slowed down. The general annual construction of urban society in 2021-23 was 10 million, less than half of the previous 25 years. The slow pace of urbanization has meant that demand for unused properties has declined from about 900 million square meters to about 400 million square meters. Extension of length of stay also matters a lot. Building 0.1 square meter of housing stock per capita would create 90 million square meters of unused housing demand, so a few small slow expansions could have a huge impact.

The serious question is when China’s housing market will finally end. The normal situation is that gross sales start to plateau near the end of some period of time. The real estate market is on target to extend its recovery of late. Unfurnished home sales will almost certainly fall to just 800 million square metres, unused length development will almost certainly fall to 500 million square meters annually, up 75 per cent.

These corrections could be very large in the history of real estate downturns around the world, and it would be fair to argue that they could be of sufficient magnitude to turn the market around or even constitute an extreme correction.

China’s urbanization will still generate demand for over 400 million square meters of unused properties in some time. As long as the length of stay increases by 0.4-0.5 square meters, which was part of the annual rate of construction within 20 years, this will generate another 400 million square meters of unused home demand for some time, and a total of Housing demand will be 800 million square meters. If housing stabilization occurs, the Chinese economy will be on a much stronger footing in the times to come. Beijing can also claim victory in structural transformation of the economic system.

However, none of this is guaranteed, as it is all based on the assumption that length of life will continue to increase at a reasonable rate according to individual and urbanization. Probably the most bearish case is that there will be very little growth, or no growth at all. This means that the market will not stabilize for some time to end, and it will continue to look for a base in 2025.