The demand for $3,000 handbags is closely related to the housing prices in China? Indeed, the two are closely intertwined. Currently, there is a huge number of vacant homes in China, with some areas being called “ghost cities,” leading to a decline in housing prices and a subsequent drop in stock prices of European luxury brands.
According to a report by The Wall Street Journal on October 8, luxury stocks in Europe fell on Tuesday (October 8) morning, as investors were disappointed by the lack of additional stimulus measures announced by the Communist Party of China’s National Development and Reform Commission.
Traditionally, the correlation between luxury consumption in China and housing prices is higher than that of the financial markets or overall economic growth. Before housing prices peaked in 2021, approximately 60% of Chinese household net wealth was tied to real estate. Economists at Barclays wrote in a research report on September 12: “Unlike the significant positive wealth effect seen in the United States after the pandemic, Chinese households suffered massive wealth losses due to the slumping real estate market, with estimated losses up to $18 trillion.”
They stated that from another perspective, this equates to an average loss of about $60,000 per Chinese household of three, nearly five times the per capita gross domestic product in China.
The stimulus measures introduced by the Communist Party so far have been insufficient to curb the decline in housing prices. According to Bloomberg Economics, there is an oversupply of approximately 60 million housing units in the Chinese real estate market.
Combined with a sluggish Chinese economy, consumer confidence has been damaged. Data from the National Bureau of Statistics of China shows that retail sales in August grew by only 2.1% compared to the same period last year.
In an environment of high unemployment, social crises, and economic turmoil, wealthy Chinese individuals are starting to avoid flaunting their wealth. The middle class is feeling the pinch of monetary tightening, becoming more cautious in their consumption of luxury goods.
The low consumer sentiment in China has impacted the European luxury goods industry. The world’s largest luxury goods company, LVMH (Moët Hennessy Louis Vuitton) Group, announced in July that its revenue for the first half of the year was below market expectations. Meanwhile, Gucci’s parent company, Kering, raised a red flag, predicting a drop of about 30% for the second half of the year after a 42% plunge in revenue in the first half.
Leading global strategic consulting firm Bain & Company predicts that the global personal luxury goods industry is expected to grow moderately, with an increase of up to 4%, but the luxury goods market in China is facing “tough times,” an “overall contraction,” which is unlikely to change in the short term.
A report by the Boston Consulting Group shows that so far this year, spending by the luxury consumer group in China has declined by 17% compared to the same period in 2023.
According to the report by The Wall Street Journal and others, unfinished and abandoned residential areas are a major challenge for the Chinese government, as well as a major headache for executives in Paris and Milan.