housing price

Where will China's housing prices go in the future?

Recently, after talking with several friends who have investment properties in China, I realized that the situation in China's real estate market is not optimistic.

According to data from the Anjuke website, even in first-tier cities like Shanghai, Beijing, and Wuhan, the prices of second-hand homes have dropped by about 20% over the past three years. The housing prices in second- and third-tier cities have declined even more sharply.

Making matters worse, due to various reasons, in most cities, not only have housing prices fallen, but transaction volumes have also shrunk significantly, creating a situation where there are prices but no market. Many properties are listed on the market at government-guided prices, but no one has shown interest for over six months. This also reflects the current difficulties in China's real estate market from one perspective.

For nearly two decades starting around 2000, China's real estate market was once thriving. The speed of housing price increases dominated the world. Almost all early real estate investors made huge profits, and the entire society developed a "real estate belief"—that housing prices would always rise and that property was the best investment.

Driven by the real estate industry, China's economy also flourished, surpassing all others for a time. Real estate and related industries accounted for about 30% of China's GDP. The "real estate belief" led to about 70% of Chinese household wealth being highly concentrated in real estate. This proportion is almost the highest in the world.

It's easy to imagine that the recent decline in housing prices has not only dragged down China's economic growth rate but also reduced the asset levels of ordinary households, leading to a lack of confidence in large-scale consumption and investment.

So, what has caused the recent decline in housing prices? Where will China's housing prices go in the future?

It goes without saying that although the Chinese government advocates "housing is for living, not for speculation," everyone understands that housing is also a commodity, and the most important factor affecting housing prices is ultimately supply and demand. Investors familiar with the real estate market know that the factors affecting the supply and demand of housing in a city or region mainly include the following.

1. Short-term: Monetary policy and government regulatory policies

Since real estate is the biggest expense for most families in their lifetime, and its status is so important, the Chinese central and local governments have introduced many financial and regulatory policies to influence the real estate market, such as the notorious purchase restriction policies.

In recent years, once high-flying real estate companies like Evergrande and Sunac have encountered severe financial problems. This is also due to the government suddenly raising the threshold for real estate companies to obtain bank loans, leading to liquidity crises for these companies, one after another. This is also one of the main factors contributing to the current round of housing price declines.

In modern society, most homebuyers use bank mortgages to purchase properties. Therefore, interest rates can greatly affect buyers' purchasing power, thereby influencing housing price trends. China's major banks are state-owned; over the past few decades, they have maintained relatively high mortgage interest rates, such as above 6%. At the same time, the government has introduced strict policies, setting down payment ratios that are rare globally, such as 40%. This has forced many families to dig into their savings and rely on financial support from multiple generations to afford a home.

Combining these factors, China's housing prices have become extremely high. According to the internationally used price-to-income ratio, in 2023, Shanghai's ratio was as high as 26, and Beijing's was 23. In comparison, New York's is 12, Tokyo's is 13, and London's is 14. By Tokyo's standards, Shanghai's housing prices would need to drop by half to be reasonable.

Recently, to rescue the real estate market, the Chinese government has introduced a series of policies, such as relaxing loan conditions for real estate companies, lowering down payments, reducing loan interest rates, and lifting purchase restrictions. These measures will help real estate companies and housing prices in the short term.

2. Medium-term: Land supply

China implements a public land ownership system, meaning all land belongs to the state. Over the past few decades, the government has strictly controlled land supply, leading to a situation where land is scarce and prices are exorbitant. Many economists have pointed out that more than half of China's urban housing prices consist of land acquisition fees and other taxes paid to the government. For example, if an ordinary family spends 5 million yuan to buy a new home in Beijing, about 2.5 million yuan goes into the government's pocket, while developers only make a small profit.

Because of this, if the government significantly increases land supply and changes the supply-demand balance, housing prices will fall. However, since local governments rely heavily on land sales for revenue, they lack the motivation to lower land prices. Therefore, I believe the government will not easily change the current land policy, which should help maintain high housing prices.

3. Long-term: Population

In 2023, China experienced its first population decline since the 1960s. But this is just the beginning.

According to United Nations projections, by 2050, China's population will drop from 1.4 billion in 2024 to 1.2–1.3 billion, with an average annual decrease of 3.5–7 million. Especially after 2030, the annual population decline will exceed 5 million, equivalent to losing a city the size of Beijing every four years.

By 2100, China's population may only be around 700 million, or even drop to around 500 million!

A major factor in the population decline is the sharp drop in birth rates. In 1963, China's newborn population hit a record high of 29.59 million; in 2016, this number was only 17.8 million; and by 2023, it plummeted to 9.02 million. In just seven years, the number of births nearly halved, the fastest decline in human history during peacetime. The number of newborns in 2023 was only 30% of that in 1963—an unprecedented cliff-like drop.

After all, housing is a durable consumer good, ultimately meant for people to live in. If a country or region's population continues to shrink, the real estate market will naturally face oversupply, eventually leading to falling prices.

Of course, this is just the national picture. Real estate is, after all, immovable property, so it depends more on local population trends.

China's urbanization rate continues to rise, and as residency policies are relaxed, more and more young people are leaving their hometowns to gather in regions with better economies, climates, and environments.

In my judgment, the future population distribution pattern in China should resemble that of its East Asian neighbors, such as South Korea and Japan, where the working-age population is highly concentrated in a few major metropolitan areas.

Take Japan as an example: the Tokyo metropolitan area and its surrounding capital region are home to 38 million people, accounting for 30% of Japan's total population!

South Korea has also caught up. The Seoul metropolitan area has a population of 26 million, accounting for 50% of South Korea's total population!

Decades from now, China's working-age population will be highly concentrated in a few major urban clusters, such as:

1. The Beijing-Tianjin metropolitan area
2. The Yangtze River Delta, including Shanghai, Nanjing, and Hangzhou
3. The Greater Bay Area, including Shenzhen, Hong Kong, and Macau
4. Other regional first-tier cities, such as Chongqing, Xi'an, Wuhan, Zhengzhou, and Changsha.

Due to the continuous influx of people from nearby rural areas and smaller cities, housing prices in these urban clusters should remain stable and retain some investment value. However, even so, if you fantasize about housing prices returning to the rapid growth seen in the early 2000s, you're basically dreaming.

As for other regions, especially second-tier and lower-tier cities far from these major metropolitan areas, housing prices will inevitably become unsustainable. Therefore, properties in these areas no longer hold much investment value.

As an ordinary investor, how should we face this future?

As I mentioned earlier, in most regions, a home for personal use is still a decent consumer good and investment. So, if you're buying a home for reasons like marriage, work, or children's education, it's still acceptable to purchase one.

Beyond that, I don't recommend ordinary Chinese families buy investment properties. If you already own investment properties, I also suggest selling them as soon as possible.

So, how should excess funds be invested?

My advice is very simple: Invest in U.S. stock index funds! Friends in mainland China can directly use RMB to purchase funds issued by Chinese fund companies, such as the S&P 500 Index Fund (513500) or the Nasdaq 100 Index Fund (159501).

In the long run, investing in these funds can yield an annualized return of about 10%, which should easily outperform the returns from investment properties in most parts of China.