China’s property market, once the backbone of the country’s growth model, is facing a more protracted and severe downturn than previously anticipated. Fresh projections from a leading global ratings agency suggest that the contraction in home sales will exceed earlier expectations, reinforcing concerns that the slump has become structurally embedded rather than cyclical.

The revised outlook signals that the housing correction is not stabilizing despite intermittent policy support. Instead, the interplay of weak demand, persistent oversupply and eroding confidence is compounding pressures across developers, local governments and the broader economy.

Sales Forecasts Recut as Momentum Fades

The ratings agency now expects primary home sales to fall by double digits this year, a sharper decline than forecast just months earlier. Such downward revisions underscore how quickly conditions have deteriorated. Earlier projections of a moderate contraction have given way to recognition that the slump is deepening.

China’s annual property sales have already fallen dramatically from their peak. Transaction values are now less than half the levels seen during the market’s zenith in the early 2020s. The pace of decline highlights the scale of adjustment underway in a sector that once accounted for more than a quarter of economic activity when related industries are included.

The deterioration reflects both structural and cyclical factors. Developers face constrained financing following regulatory crackdowns on excessive leverage. At the same time, prospective buyers remain cautious amid falling prices and uncertain economic prospects.

Oversupply Locks the Market in a Vicious Cycle

One of the most persistent challenges is excess inventory. For years, construction continued even as sales momentum waned. Developers, reliant on pre-sales to fund projects, pressed ahead with building to maintain cash flow. The result has been a glut of completed but unsold housing.

Excess supply exerts downward pressure on prices. Price declines, in turn, undermine buyer confidence. Potential homeowners delay purchases in anticipation of further discounts, further suppressing demand. This self-reinforcing dynamic makes recovery difficult without substantial intervention.

Analysts note that local governments have introduced programs to purchase unsold units for conversion into affordable housing. However, these efforts have been incremental relative to the scale of oversupply. Without a coordinated and sizable absorption plan, the inventory overhang may persist for years.

Major Cities No Longer Immune

Perhaps most concerning is the erosion of resilience in China’s largest metropolitan areas. Historically, cities such as Beijing, Shenzhen and Guangzhou were viewed as stabilizing anchors capable of leading any national rebound. Price declines in these markets suggest that weakness is no longer confined to smaller, overbuilt regions.

The cooling in top-tier cities reflects broader macroeconomic headwinds. Slower income growth, cautious consumer sentiment and demographic shifts have tempered appetite for property investment. Younger households, facing high employment uncertainty and changing lifestyle preferences, are less inclined to view homeownership as a guaranteed path to wealth accumulation.

Shanghai has shown pockets of relative strength, but isolated gains have not offset broader softness. The convergence of price declines across multiple urban centers signals that demand recovery may take longer than previously anticipated.

Developer Strain and Credit Implications

The downturn places mounting strain on property developers. Revenue declines restrict cash flow, complicating debt servicing and refinancing. Several high-profile developers have sought extensions on bond repayments or faced rating downgrades.

Should sales undershoot even revised projections, additional credit pressure is likely. Ratings agencies warn that further declines could prompt downgrades among major builders. Reduced access to capital would exacerbate liquidity constraints, potentially leading to project delays or additional defaults.

Developers’ financial stress also reverberates through the banking system and shadow financing channels. While authorities have sought to ring-fence systemic risk, property remains deeply intertwined with China’s financial architecture.

Policy Priorities and Limited Stimulus

Chinese policymakers have taken a measured approach to supporting the sector. While mortgage rates have been eased and some purchase restrictions relaxed, sweeping stimulus akin to previous cycles has not materialized. Instead, the government has prioritized investment in advanced manufacturing and technology as engines of future growth.

This strategic pivot reflects a broader shift in economic policy, aiming to rebalance away from property-driven expansion toward innovation-led development. However, technology investment has yet to fully offset the drag from real estate.

Economists caution that insufficient support for housing may prolong the adjustment. Yet large-scale intervention carries risks of reigniting speculative excess. Policymakers thus face a delicate balancing act between stabilizing the market and preventing renewed imbalances.

Demographic and Structural Headwinds

Beyond cyclical pressures, structural factors weigh on the sector. China’s population has begun to decline, and urbanization is slowing compared to prior decades. Household formation rates are moderating, reducing the organic demand that once fueled housing expansion.

Moreover, property investment as a store of wealth is less appealing in a context of falling prices. Alternative financial products and shifting generational preferences may gradually diminish the cultural emphasis on real estate ownership.

These trends suggest that even if sales stabilize, a return to the high-growth trajectory of previous years is unlikely. The market may be transitioning to a lower, more sustainable equilibrium.

Broader Economic Implications

The property sector’s contraction has ripple effects across steel, cement, household appliances and local government finances. Land sales have historically been a major revenue source for municipalities, funding infrastructure and social programs. Reduced land transactions constrain fiscal capacity.

Exports have provided some offset to domestic weakness, but reliance on external demand introduces vulnerability to global trade tensions. If housing remains depressed, China’s economic growth model may continue shifting toward manufacturing, green technology and digital industries.

For now, the revised outlook from ratings analysts reflects acknowledgment that the downturn is entrenched. Sales declines, oversupply and confidence erosion are interacting in ways that make near-term recovery elusive. While policy adjustments may moderate the slide, the sector’s path forward appears more gradual and complex than earlier forecasts suggested.

(Adapted from CNBC.com)