According to economists’ calculations, the overall impact of the mainland real estate market accounts for 25% of China’s GDP, dragging down GDP growth by 2 percentage points in the first three quarters of this year. Currently, there are no signs of a stabilization in the mainland property market, and at least three indicators suggest that next year’s housing price decline may exceed expectations.
The article by Liao Qun, Chief Economist of Sun Hung Kai Group, Director of the Research Center for Economics at Hainan University, Senior Research Fellow at the Chongyang Institute for Financial Studies at Renmin University of China, and a member of the China Chief Economists Forum, was published on the WeChat public account “Chief Economist Forum” on October 27th. The article uses data to illustrate the importance of the real estate market to the Chinese economy.
According to Liao Qun’s article, one of the reasons for the current downturn in the Chinese economy is insufficient demand, with a key drag being the substantial decline in the real estate market. The article emphasizes that the impact of the real estate market on the Chinese economy is significant and may exceed most people’s expectations.
The article explains that the impact of real estate on the economy can be divided into direct and indirect aspects. Direct impact refers to the narrow influence of the real estate industry, while indirect impact includes the impact on upstream and downstream industries related to real estate, as well as the wealth effect of real estate.
Narrowly speaking, the real estate industry consists of real estate development companies, intermediary agencies, management companies, and construction companies; upstream industries include steel, cement, glass, building materials, and metal products; downstream industries consist of appliances, furniture, decoration, automotive, among others; the wealth effect refers to the effect of changes in real estate prices on residents’ wealth values and their spending behavior.
How significant are the direct and indirect impacts? Based on statistics, the real estate sector directly affected China’s GDP by 10.2% in 2023. As for the indirect impact, estimates range from 10% to 20%, with a median of 15%.
The article further suggests that while the wealth effect may be difficult to quantify, it should not be disregarded. This effect is evident among multiple homeowners and to some extent among single homeowners as well. With 73% homeownership rate in China’s urban areas in 2020, the overall impact cannot be ignored. Using the median estimate of indirect impact at 15% from the market valuation range of 10%-20% should not be an overestimation.
The wealth effect on residents’ consumption expenditure, especially on high-end consumption, has been a contributing factor to the recent softening of consumption and the so-called consumption downgrading trend, where the proportion of high-end consumption in total consumption has decreased.
Liao Qun asserts that considering both direct and indirect impacts, the estimation that the real estate market’s overall impact on China’s GDP is 25% is not an overestimation.
Looking at the real estate sales data for the first three quarters released by the National Bureau of Statistics, as well as data on real estate development investment and the decline in prices of new residential properties in 70 major cities in September, Liao Qun believes that an 8% overall decline in the real estate market is a reasonable estimation.
“A real estate market decline of 8%, which impacts GDP by 25%, can be calculated to result in a drag of 2.0% on GDP growth.”
Data from the demand side also reinforces the above findings. Liao Qun points out that the current weak domestic demand is a key factor dragging down the Chinese economy, with the significant decline in the real estate market being a major contributor. The representation of domestic demand includes both consumption and fixed asset investment.
Liao Qun’s analysis shows that in the first three quarters, real estate development investment in China dropped significantly by 10.1%, dragging down overall fixed asset investment by 2.2 percentage points, and affecting GDP growth by 0.9 percentage points. Looking at consumer goods, products related to the downstream real estate sector mostly experienced declines, and items highly correlated with the real estate wealth effect such as cosmetics, jewelry, and automobiles also decreased, dragging down the growth rate of social consumer goods retail sales by 2.5 percentage points, and affecting GDP growth by 1.1 percentage points.
The above-mentioned data and analyses make it clear that the substantial decline in the real estate market not only significantly impacts consumption but also leads to a noticeable weakening in fixed asset investment, representing a crucial pressure point in China’s current economic growth. Therefore, stabilizing the real estate market will have a ripple effect on boosting both consumption and fixed asset investment growth. Failure to stabilize the real estate market could impede their effective recovery or prevent a sustained rebound.
The Chinese government introduced a package of economic policies from September 24 in an attempt to achieve a 5% economic growth target this year. The Politburo meeting of the Communist Party of China proposed to “promote the stabilization of the real estate market.”
However, with Chinese property prices having declined for three consecutive years, industry insiders and property owners alike describe this year’s real estate situation as “bleak.” Some real estate intermediaries have realized that the downturn in the real estate market cannot be reversed in the short term and have decided to switch professions, while others opt to supplement their household income by working part-time as network car drivers.
Industry insiders predict that at least three signs indicate that the extent of the decline in housing prices in 2025 will surpass expectations.
1. The reversal of supply-demand relationships in the property market, where supply exceeds demand, has become a reality. Previously, the Ministry of Housing and Urban-Rural Development of China disclosed that the number of residential buildings in the country has reached 6 billion units, including not only high-rise residential buildings but also factories, schools, and office buildings. Even if each building houses an average of 4 people, it would already meet the housing needs of 2.4 billion people.
2. Sales pressure is increasing for new and second-hand properties, with the area of unsold commercial housing hitting record highs. By the end of July this year, the total unsold area of commercial housing in the country had reached 73.962 million square meters, a 14.5% increase year-on-year.
Furthermore, the number of listings for second-hand homes has surged, with over 180,000 listings in Shanghai and over 150,000 in Beijing. The increase in market supply alongside a decrease in demand for purchasing homes forces property developers and second-hand homeowners to resort to price reductions to quickly sell their properties, thereby intensifying the downward price pressure on both new and second-hand properties.
3. The growth rate of residents’ income is slowing down, and ordinary individuals have a more pessimistic outlook on future income. In the first quarter of this year, personal income tax revenue decreased by 15.9%, a data point directly reflecting residents’ economic conditions. With declining income levels for residents, it becomes challenging to afford the current high housing prices.
This comprehensive analysis suggests that the challenges faced by the real estate market in China have multifaceted impacts on the economy and provide an intricate outlook for the future.