Haitong's 2025 Real Estate Outlook: Decline may narrow, sales performance may exceed price.

Investment Highlights In 2025, the real estate market in China may see some improvement overall, with a possible narrowing of the decline. Since 2021, the real estate market in China has undergone significant adjustments. Referring to overseas experiences, the adjustment speed of real estate prices in China is relatively slow, but there is a large adjustment in quantity and it is faster. Taking into account the changes in the trend of homebuyers in China, the second-hand housing squeeze effect, inventory issues, and active policy support, we believe that the real estate market in China may see some improvement in 2025, with a possible narrowing of the decline. Sales performance may exceed prices, while construction investment still faces certain pressures that need to be addressed. The differentiation between large and small cities may continue, with prices in top-tier cities still under pressure, but quantity may still have resilience. Low-tier cities may still face pressure in terms of real estate volume. Regionally, real estate markets in top-tier cities in China may experience a late adjustment, with price adjustments happening faster than quantity adjustments. Low-tier cities may still face significant pressure in terms of inventory clearance. Overseas experiences show that the size of the real estate bubble and demographic factors have a significant impact on the trends in the real estate market. If there is a large bubble, the adjustment will be significant, but if there is an inflow of population, it can support the performance of real estate quantity. Therefore, considering overseas experiences, without considering new policies, we believe that the pressure on the quantity of real estate in top-tier cities in China will be lower than prices, while the pressure on the quantity in low-tier cities will still be significant. We believe that real estate policies need more fiscal investment, and currently, policies are gradually shifting from monetary means to fiscal means. In 2024, the focus of the two rounds of stabilized real estate policies has been shifting from monetary means to fiscal means. In 2025, policies to support residential demand still have some room, especially for top-tier cities, where adjusting housing purchase policies might be effective. Incremental policies should also increase fiscal support to revitalize existing assets, especially in low-tier cities. Tailored and targeted policies based on local conditions will continue to be the main direction of active policy reinforcement. Overall, the policy direction has become more proactive, and we believe that policies will be further enhanced based on economic conditions. In the medium to long term, we believe that the Chinese economy still has significant potential to be realized. Risk warning: Delays in implementing real estate policies and slower-than-expected recovery of the domestic economy. Improvement in total volume: narrowing of the decline Since 2021, China's real estate market has experienced a three-year period of deep adjustments, but under the macroeconomic policy background of "stabilizing the market", the decline in real estate sales narrowed in the second half of 2024, indicating the initial effect of policy support. Looking at the national real estate market in 2024, on one hand, new home sales and real estate investments showed a narrowing decline compared to the previous year, while prices and new construction were still on a downward trend, with a long inventory clearance cycle. Although the effect of policy support was evident, it still needs to be strengthened. So, what can we expect from the real estate market in 2025? From a total volume perspective, we refer to the experiences of the real estate downturn cycles in the US and Japan and make inferences about real estate indicators in 2025 based on the current fundamentals and policy intensity. First, we briefly review the real estate downturn cycles that began in the US in 2008 and in Japan in 1990. We find that the overall decline in US real estate was fast, while in Japan it was slow and lasted a long time. The decline in the volume of US real estate was significantly larger than that in price, while in Japan the decline in price was slightly larger than that in quantity. The reasons for this are, first, the different forms of the bubbles in the two countries. The US bubble mainly manifested in quantity (sales and construction) and a large number of houses were built during the period of rising prices, which overextended the future space for construction. The bubble in Japan was more reflected in prices, with the price bubble being slightly larger than the quantity bubble, resulting in a larger decline in prices but a relatively smaller decline in the quantity indicators such as real estate sales and investments. Second, the response patterns to the crises in the two countries were different. After the US real estate crisis, deleveraging occurred rapidly, financial risks were exposed early, and residents and enterprises began to weaken their expectations earlier, resulting in a faster decline in home buying and construction intentions. In contrast, Japanese residents and enterprises were more optimistic about the situation initially, did not quickly clear their debts, and with the support of policies and special factors such as geological disasters, sales and construction saw a brief rebound from 1994 to 1996. Third, the demographic trends after the crises were different, with Japan experiencing a slower and longer downturn due to a long-term downward trend in the rigid home buying population. Horizontally comparing prices, without considering policy factors, China's real estate prices are in the middle stage of a correction, with a relatively slow adjustment speed. As of November 2024, second-hand residential prices in China had fallen by 16% from their peak and the overall annualized decline was still expanding. In the same time period, prices in the US and Japan fell by 28% and 10% respectively from their peaks. The speed of price decline in Japan is similar to that of China, while the US experienced a faster and larger decline. In terms of sales volume, China's adjustment has exceeded that of the US and Japan. The estimated sales area of commercial housing in 2024 is about 940 million square meters, with a year-on-year decline expected to narrow from 17.7% in 2023 to 15.9%, with an absolute value of 50% from the peak. According to international experiences, US and Japanese real estate sales fell to 57% and 78% of their peak levels, respectively, in the third year of their downturn. In terms of the time of the correction, real estate sales in the US stabilized after three years of decline, while Japan saw a temporary rebound. In terms of construction, China's adjustment is close to that of the US and has exceeded that of Japan. We expect the new construction area of residential buildings in 2024 to be around 730 million square meters, with a year-on-year decline of 23.0%, still expanding from the previous year. In the third year of real estate downturns, US and Japanese real estate construction trends were similar to sales, with a rebound in construction in the US and a phase of recovery in Japan. In terms of the depth of the decline, after three years of declining trends, the construction area in the US fell to 27% from its peak, with a larger decline compared to China. Real estate investment and construction are highly synchronized, and their trends are similar. Overall, China's real estate investment decline is similar to that of the US. However, there are some specific problems in China's real estate market that need to be addressed by policy measures. Firstly, the decline in the number of homebuyers in China is faster. Before and after house prices peaked and began to fall, the number of homebuyers in China decreased sharply, while in Japan, the decline was relatively moderate, and the US did not see a significant decrease.Decrease. Secondly, the crowding out effect of second-hand houses on the new housing market is more obvious. Currently, the proportion of second-hand house transactions has been consistently around 60%, and is still on the rise. Finally, there is a certain inventory backlog in the real estate market in China. Despite our calculations showing a continued decrease in the overall inventory area, the inventory cycle remains long. The inventory-to-sales ratio is still high, which may reflect that effective demand still needs to be improved.Based on the experiences of the United States and Japan, and considering the uniqueness of our country as well as policy support, it is expected that the real estate market in 2025 may see marginal improvements, with sales and price declines expected to narrow. Sales performance may be better than prices, while investment in new construction still needs to be boosted. In terms of sales, drawing on overseas experiences, the trend of real estate sales in our country may be more similar to that of the United States, taking into account population factors and the impact of the secondary housing market, with real estate sales in 2025 expected to see a narrowing decline. Regarding prices, based on overseas experiences, price declines may also narrow, but without strong external intervention, the duration of the downward trend in prices may be longer. As for new construction, considering that the current stage of relief for real estate enterprises in our country has not ended, pressure from capital occupation due to construction completion, and the need to reduce inventory, new construction and investment in our country may still require more active policy support. Big and small cities: How will sales and prices evolve? In 2024, another characteristic of the real estate market in our country is the significant differentiation between regions. Referring to overseas experiences, how will the real estate markets in different regions of the country perform? Currently, there is a differentiation in real estate data between cities of different levels in our country. Overall, first-tier cities have experienced a slower decline in sales compared to price drops, but the decline in quantity has been slower. In terms of prices, the cumulative increase in first-tier cities since 2011 has been significantly greater than that of second and third-tier cities. Although first-tier city prices fell later, the adjustment speed was faster in the short term. In terms of sales, after entering this round of adjustment cycles, real estate sales in first-tier cities have declined later and to a lesser extent, which may be primarily due to the smaller bubble in real estate volume in first-tier cities and the support from a larger number of genuine homebuyers. A similar situation is seen in investments, where land transaction amounts in first-tier cities dropped later and the decline has been smaller. Regarding inventory, the structure is more complex, with greater pressure on liquidation in third and fourth-tier cities as well as some second-tier cities, while the months needed to clear inventory in first-tier cities have begun to reduce. According to international experiences, during a downturn in the real estate market, there is also significant differentiation between cities. Considering factors such as data availability and comparability, we compared cities of different levels during the housing bubbles in the United States in 2008 and Japan in the 1990s. In a downturn period, the size of the bubble and population are two major factors that significantly impact the fundamentals of real estate. Specifically, regions with a significant accumulation of bubbles in the early stages experience larger declines in both quantity and price in the later stages. When the degree of the bubble is similar, regions with continued population influx may have some support in terms of sales volume. In our sample selection, we compared the major metropolitan areas and other regions in the United States as well as Japan. In the United States, we compared the West and South regions, mainly because the population growth rates are similar in these regions. The West region has significantly higher price increases and growth rates as well as a speculative atmosphere compared to the South region. In Japan, the major metropolitan areas mainly include the capital region where Tokyo is located, the Kinki region where Osaka is located, and the Chukyo region where Nagoya is located. After experiencing a short-term population outflow in the late 1990s, these areas began to attract population towards the metropolitan areas starting from 1997. The differentiation in the real estate markets between the West and South regions in the United States is mainly due to the size of the bubbles. The larger the bubble, the greater the increase in prices in the early stages, leading to greater declines in the later stages. Factors such as the limited elasticity of housing supply in the West region and higher construction costs make the real estate market more speculative in the West compared to the South. In the 60 months leading up to the highest point, housing prices in the West region increased by 70%, which is significantly higher than the 38% increase in the South region, while the higher bubble in the West region also resulted in a faster decline and larger pullback in housing prices. It took about 51 months for housing prices in the West region to stabilize after falling from their peak, with a cumulative decline of 36%, whereas housing prices in the South region only pulled back by 15% compared to their peak. The high accumulation of bubbles in the West region also led to a larger decline in quantity. Under the influence of speculative sentiment, the growth in quantity in the West region during this bubble accumulation process was slightly faster than in the South, but the difference between quantity and price was not as significant. As the bubble burst, new home sales in the West region declined by 82% from the peak, while in the South region, new home sales only declined by 74% after the bubble burst, showing a similar trend in new home construction data. In general, the greater the increase in quantity in the early stages and the larger the bubble, the greater the adjustment in quantity. In Japan, we compared the major metropolitan areas with different population trends to other regions. We found that there was not a significant difference between the major metropolitan areas and other regions in terms of housing prices and new construction during the early stages of bubble accumulation. After the bubble burst, the downward trend in housing prices was generally consistent, but there was a more noticeable difference in new construction, with the decline in new construction area in the major metropolitan areas relatively slower and consistently higher than in other regions. In general, both the experiences of the United States and Japan emphasize the impact of the accumulation of bubbles and population on the real estate market. On the one hand, regions with a larger accumulation of bubbles see faster and greater declines in prices and fundamentals after the bubble bursts; on the other hand, if the population continues to flow into an area, under demand support, the quantity of real estate during the downturn period still shows resilience. Looking ahead, based on overseas experiences and without considering additional policies, we believe that even if there is pressure on prices in high-tier cities, the pressure on quantity will be much lower, while in low-tier cities, the pressure on the real estate market may come more from quantity. Referring to international experiences, real estate valuations in high-tier cities in our country are relatively high, but are expected to be supported by population influx, while real estate valuations in low-tier cities are lower, but face pressure from population outflow. We predict that prices in first-tier cities may still face some pressure, but considering population influx and relatively small inventory pressure, the decline in real estate quantity may be somewhat reduced; while for low-tier cities, due to the impact of population outflow on genuine demand, the downward pressure on real estate quantity may be greater. Of course, we also... We need to pay attention to whether there will be unexpected changes in the policy end.Policy: Increased fiscal support, tailored to local conditions The previous predictions were based on overseas experience and the current situation in the country's real estate market in 2025. However, an important variable influencing the real estate market in 2025 is policy. So, in which dimensions can real estate policies in 2025 be strengthened to achieve maximum utility, and to stabilize the real estate market? Firstly, let's briefly review the two rounds of real estate incremental policies in 2024. In terms of policy content, there was a shift from monetary tools to fiscal tools. The two rounds of real estate policies introduced in 2024, namely the May 17th and September 24th policies, focused on lowering the threshold for home purchase to stimulate market demand. Different regions adjusted their policies based on their own circumstances, embodying the principle of "tailoring measures to local conditions". The September 24th policy not only continued to stimulate demand but also focused on reducing the burden of existing home loans for residents, government-led destocking, and easing liquidity pressures on real estate companies, shifting from monetary tools to fiscal tools. After the implementation of the two rounds of real estate policies in 2024, the year-on-year growth rate of real estate sales showed short-term improvement, but the sustainability needs to be increased, and the phenomenon of "price for quantity" continued. Following the May 17th policy, the year-on-year decline in real estate sales narrowed to within 20%, but real estate sales continued to decline in July to September. Following the September 24th policy, the year-on-year decline in sales narrowed to around 0%, but this was influenced by the continuous decrease in the base period in the same period of 2023, with a month-on-month decrease in November. Although there was marginal improvement in volume, there is still pressure on prices, and the stimulating effect of new construction and real estate investment is limited. This indicates that the phenomenon of "price for quantity" is quite evident in the real estate sales end. The effects of structural monetary policy tools such as relief for real estate companies and destocking need to be observed. As of the end of September 2024, the usage of the three major structural monetary tools in the real estate sector still needs to be boosted. For example, the refinancing of affordable housing has reached 16.2 billion by December 2024, an increase of 4.1 billion from the end of June, but still only accounts for 5.4% of the total quota of 300 billion; and the special refinancing for real estate companies and building completion loan support programs respectively account for 26.1% and 6.4% of the total completion quota. Looking ahead to the policy in 2025, we believe that residents still have a certain degree of rigid and improvement needs that can be released, and it is expected that policies such as interest rate cuts and reducing down payments to stimulate demand on the residents' end will further land in 2025. First, there is room for both new mortgage rates and existing mortgage rates to be lowered; second, reducing down payments, the down payment ratio in most cities has been reduced to below 15%, and only first-tier cities still have a high down payment proportion for second-hand homes, which could also be lowered; third, relaxing purchase restrictions, currently only Beijing, Shanghai, Shenzhen, and Haikou still have certain levels of purchase restrictions, and there is a greater possibility of further adjustments in the future. Secondly, we believe that incremental policies should increase fiscal support to encourage central state-owned enterprises to acquire and activate existing assets, which may have a more immediate impact on volume support. In the current operations of acquisitions, the acquired homes are mostly existing commercial housing with an area of around 70-120 square meters, and are usually required to be acquired at a reasonable price, usually referring to the reset price of affordable housing or the price cap of "land cost + construction cost + not more than 5% profit", the unit price won't be too high. The previously implemented refinancing policy for affordable housing has already achieved certain results. By December 2024, more than 10 cities, including Chongqing, Suzhou, Wuhan, Zhengzhou, Changchun, and Jinhua, had implemented acquisition projects for existing housing and raised funds for tens of thousands of units of affordable housing. So, if the policy in 2025 escalates in terms of government acquisitions, how much new real estate demand can be driven? We estimate that the level of fiscal support may be in the range of 300 to 500 billion yuan. Referring to the issuance of special land reserve bonds from 2017 to 2019, the annual issuance scale of special land reserve bonds in various regions in 2017-2019 was about 240.7 billion yuan, 589.3 billion yuan, and 676.5 billion yuan, accounting for 25%, 43%, and 31% of the total amount each year. If there is an additional 500 billion yuan of special bonds issued in 2025 for acquiring existing housing, calculated based on a 100% contribution ratio and an average purchase price of 7000 yuan per square meter, it could increase sales area by 70 million square meters. However, on one hand, it is necessary to consider the destination of the acquired assets; if these homes are used for affordable rental housing, it may consume a certain amount of residential purchasing power. On the other hand, the cost of government acquisitions may be high and bring certain fiscal pressures, so the quota may be relatively small. By referring to the experience of strong fiscal policy support for real estate in overseas countries, the difficulty in controlling the "volume" of real estate will be smaller, while the difficulty in controlling the "price" will be greater. For example, looking at South Korea's affordable housing construction plan which began in 1988. In the 1990s, the government of South Korea under the leadership of Roh Tae-woo chose to increase housing supply and introduce "public ownership of land", launching the "Construction Plan for 2 Million Housing Units (1988-1992)" and the "New Economy Five-Year Plan (1993-1997)". During these two planning periods, a total of 5.84 million homes were built and introduced into the market at low prices. As a result, South Korea's real estate construction and investment quickly rebounded to maintain a high level, but due to the increase in real estate supply, the improvement in housing prices was relatively limited. In addition to increasing the overall volume, we expect that real estate policies in 2025 will emphasize more on "tailoring measures to local conditions" and take different support measures in different levels of regions. As we saw in the second part, there is a significant differentiation in the structure of China's real estate market, and different levels of cities face different primary issues in the real estate market. Lower-level cities in China, from the data perspective, are currently facing the primary issues of high inventory and continuing downward pressure on volume in the real estate market. On the other hand, first-tier cities still have some rigid demand restricted by purchase restrictions and high down payment ratios, with continued pressure on volume and price for real estate. In this stage, in policy implementation, higher-tier cities should focus more on activating potential resident demand, while lower-tier cities should focus more on activating existing assets. Looking ahead to 2025, we believe that real estate policies need more fiscal support and should be more targeted in their allocation, in order to have a more significant uplifting effect on the real estate market. On one hand, 300 to 500 billion yuan of fiscal funds can be directly allocated to the purchase of existing housing, supporting the sales end. On the other hand, it is important to think about the direction of the acquired assets; if these homes are used for affordable rental housing, it may consume a certain amount of residential purchasing power. The cost of government acquisitions may be high and bring certain fiscal pressures, so the quota may be relatively small.High-tier cities have further relaxed housing purchase restrictions, which has helped stabilize both quantity and price. Lower-tier cities should focus more on controlling the storage of housing units and consider more diversified arrangements for their use. In order for the effects of real estate policies to be demonstrated, it is also necessary to improve residents' income and housing price expectations, lower financing interest rates, and accelerate localization of debt to ease local government financial and debt pressures.Overall, the policy direction has shifted to a more positive direction. We believe that policies will be adjusted according to changes in the economic situation. In the medium to long term, we believe that the Chinese economy still has great potential to be unleashed. Risk warning: The implementation progress of real estate policies may not meet expectations, and domestic economic recovery may not meet expectations. This article is reprinted from the WeChat public account "Haitong Macro Research", GMTEight editor: Chen Xiaoyi.