Sinolink: The bottom of the real estate market may not be far away. It is expected to stabilize in the first and second quarters of next year.

From the perspective of the proportion of second-hand housing transactions, rental yield, and house price to income ratio, the real estate market is not far from stabilizing after the downturn. According to the current market adjustment pace, it is expected that the market will stabilize in the first and second quarters of next year. In the article "The Dilemma of the Current Real Estate Market", we pointed out that the dilemma of new houses lies in quantity (instability), and the dilemma of second-hand houses lies in price (instability). The key to determining when the real estate market will stabilize after the downturn lies in whether the new house sales volume, second-hand house prices, and market valuation bubble have bottomed out. Distance of Real Estate "Stabilization After Downturn" (1) The proportion of second-hand housing transactions corresponds to the "stability of quantity" of new houses. Since 2022, the overall transaction area of new residential and second-hand residential housing nationwide has remained stable at around 1.5 billion square meters, and the shrinkage of the transaction area of new houses mainly comes from the accelerated substitution of second-hand houses for new houses. The annual average growth rate of the proportion of second-hand housing transactions nationwide in 2022-2024 is around 8-10 percentage points. In 2025, signs of stabilization in the structure of transactions will begin to appear, and it is expected that the proportion of second-hand housing transactions nationwide will reach around 50%, with the growth rate narrowing to 4 percentage points compared to the previous year. So, is there an upper limit to the proportion of second-hand housing transactions? When the proportion of second-hand housing transactions approaches this level, the transaction structure of the real estate market will tend to stabilize, meaning that the "squeeze out" of second-hand houses on new house sales volume will be close to the end, and the new house market is expected to stabilize. Firstly, from the perspective of international experience, mature real estate markets usually have a stable range for the proportion of second-hand housing transactions, determined by the lifespan of houses. The longer the lifespan, the higher the proportion of second-hand housing transactions. The logic behind this is that homes beyond the years of use generally do not circulate in the second-hand housing market and cannot form effective supply. For example, the average lifespan of housing in the UK can reach 132 years, so the proportion of second-hand housing transactions is highest at 90%; while in Japan, the average lifespan of housing is only 25 years, leading to the lowest proportion of second-hand housing transactions (63%). The average lifespan of housing in mainland China is about 30 years, slightly higher than Japan, but lower than Hong Kong's 50 years. Therefore, after the real estate market enters a mature period, the proportion of second-hand housing transactions in mainland China should theoretically be higher than Japan (60%-63%) but lower than Hong Kong (74%-77%). Taking into account that the urbanization rate of the permanent population in mainland China is only 67%, which is still significantly lower than Japan (92%) and Hong Kong (100%), and the influx of population into low-energy-level cities and towns in mainland China is less, the second-hand housing market is not very active. Therefore, comparing the proportion of second-hand housing transactions nationwide with Japan and Hong Kong may not be appropriate. We have selected 18 cities with samples at different levels and used the proportion of second-hand housing transactions in these cities as one of the indicators to judge the stabilization of the real estate market after the downturn. According to calculations, the proportion of second-hand housing transactions in the first three quarters of this year in the 18 sample cities reached 57.2%, an increase of 5.8 percentage points from the same period last year. In September, the proportion of second-hand housing transactions reached 57.7%, an increase of 33 percentage points from the low point in October 2021. At the current rate of increase, it is expected that in the first half of next year, the proportion of second-hand housing transactions in the 18 sample cities will approach or exceed the lower boundary of the stable range of Japan (60%-63%). This means that the sales volume of new houses is expected to stabilize next year, and the year-on-year growth rate of sales area of new residential buildings is expected to return to zero. Secondly, with the entry of "good houses" into the market, new houses and second-hand houses are no longer in direct competition. This to some extent suppresses the impact of second-hand houses on new house sales, thereby suppressing the speed of increase and upper limit of the proportion of second-hand housing transactions. Recent transaction data shows that second-hand houses are accelerating towards meeting essential needs. In September, the proportion of second-hand houses with a total price below 5 million yuan accounted for 78% in Beijing, 82% in Shanghai, 93% in Guangzhou, and 76% in Shenzhen. The total price of transactions in cities other than Hangzhou is generally below 2 million yuan. In terms of supply structure, the trend of "improving" new houses is becoming more apparent. According to data from the Ke Yuan Institute, in key cities, the proportion of demand for essential housing, improvement housing, and high-end housing in the supply of commercial housing in September was 30%, 53%, and 17% respectively, with improvement demand and high-end demand accounting for 70%. At the same time, more than 80% of cities' new housing supply is dominated by improvement demand and high-end demand. With the improvement of new residential products, the attractiveness of new houses compared to second-hand houses increases, diverting some of the improvement demand. With the release of high-quality new supply, the stable level of the proportion of second-hand housing transactions in the 18 sample cities may be lower than 60%-63%, indicating that the stabilization of new house "quantity" may come earlier. (2) Rental yield corresponds to the stability of the "price" of second-hand houses. The value of a house is mainly composed of three parts: one is the living value, which is roughly equal to the discounted future rent, the determining factors of which are the rental yield and rental change rate; the second is the investment value. In the past rapid development stage of real estate, purchasing property was equivalent to holding an upside option, even if the rental yield was low, the expectation of rising prices would support the demand for purchases; the third is the ownership value, which includes district value and mortgage value, among others. As China's real estate market gradually matures, houses are transitioning from investment products to consumer goods. Once a house becomes a consumer good, its investment value is no longer the main factor affecting valuation, and the living value determined by the rental yield becomes the "anchor" of the house's valuation. With the decline in house prices, the rental yield passively increases. When the rental yield is higher than a reasonable level, the house will "fall" out of its intrinsic value, and the real estate market is expected to stabilize. So, how do we determine the reasonable level of rental yield? Firstly, from the perspective of first-time buyers, the reasonable rental yield should be close to the provident fund loan rate, roughly between 2.5%-2.6%. On one hand, first-time buyers considering buying a home mainly consider the living value when making decisions between renting and buying a home. When the rental yield is close to the loan rate, it means that the cost of renting and buying a home is similar. Considering that the ownership value of a house is greater than or equal to 0, buying a house is the more appropriate choice in this situation. On the other hand, based on the experience of real estate markets stabilizing in the United States and Japan (US in 2011, Japan in 2009), the difference between net rental yield and the 30-year mortgage loan rate was around -20 to 30 basis points. After the subprime mortgage crisis, the US real estate market entered a downward cycle until new house sales and prices bottomed out in 2011. At this time, the net rental yield, excluding holding costs, was about 4.75%, 30 basis points higher than the 30-year mortgage loan rate. Similarly, after the bursting of the economic bubble in Japan, the real estate market continued to decline until house prices bottomed out in 2009. At this time, the net rental yield was about 2.28%, 20 basis points lower than the mortgage loan rate. Currently, the 5-year LPR in China is 3.5%, and most local first-home mortgage rates are generally around LPR-50 basis points, roughly 3.0%. Taking into account the existence of the provident fund loan system and the clear characteristics of first-time buyers in the second-hand housing market, except for first-tier cities, the total transaction price of second-hand housing is concentrated below 1 million yuan, generally lower than the upper limit of the provident fund loan amount. The more rational "anchor" for house pricing is a rental yield close to 2.6% of the provident fund loan rate, with a fluctuation range of about 20 basis points, or 2.4%-2.8%. According to Wind's data, the national average rental yield in 100 cities is 2.37%, still slightly below the reasonable level by 10-20 basis points. Based on the current adjustment speed of house prices, it is expected that around the second quarter of next year, the rental yield will initially reach the reasonable range. If there are further interest rate cuts and reductions in the provident fund loan rate, the reasonable level of rental yield will be lower, and the stabilization of the "price" of second-hand houses may come sooner. (3) Looking at the absolute level, is the rental yield in China still too low? As of September 2025, the national rental yield in 100 cities is 2.37%. The rental yields in first-tier, second-tier, and third-fourth-tier cities are 1.80%, 2.45%, and 2.54% respectively. Due to the very low holding costs of properties, the net rental yield is basically equal to the rental yield. In China, the overall rental yield ratio is perceived as being high, with values like 2.37% obtained based on the same method. However, when recalculated using the median values of second-hand housing transactions and household disposable income, even in first-tier cities like Beijing and Shanghai, the house price to income ratio does not exceed 15, which is generally considered to have returned to a relatively reasonable range. In cities such as Beijing, Shanghai, Guangzhou, and Shenzhen, the house price to income ratio ranges from 12.3 to 14.6. Meanwhile, in cities like Hangzhou, Chengdu, Chongqing, and Wuhan, the ratio ranges from 4.4 to 6.1. This indicates a significant digestion of the housing price-to-income ratio. Looking at the market stabilization pace, it is expected that the stabilization of new houses will occur earlier than the stabilization of second-hand houses. For different types of properties, the order of stabilization is predicted to be: new good houses > old rundown small houses > improvement houses > old current houses. Rental yield of 2.5% is the "anchor" for the overall real estate market stabilization. Different cities and property types would have different rental yield levels for stabilization. For first-tier cities, where urbanization has not yet been completed, real estate markets in these cities may stabilize with rental yields around 2.0%-2.2%. For second and third-tier cities, those with high rental yields and rental price stability are more likely to achieve stabilization. Current examples include Urumqi, Guiyang, and Harbin. When will the Real Estate Market Reach "The Last Drop"? Whether looking at the proportion of second-hand housing transactions, the rental yield, or the house price to income ratio, the real estate market is not far from stabilizing after the downturn. According to the current market adjustment pace, it is expected that the market will stabilize in the first and second quarters of next year. The prediction for which markets will stabilize first, and the sequence in which they will stabilize, depends on the type and quality of properties. New good houses are expected to stabilize before rundown small houses, improvement houses, and old current houses. Similarly, second-tier cities with higher rental yields and rental price stability may stabilize faster than first-tier cities. It is important to note that the stabilization of the real estate market will not happen overnight. Different cities and types of properties will experience stabilization at different paces. The stabilization of rental yield at 2.5% can act as an anchor for the real estate market to stabilize. However, factors such as economic conditions and social expectations will also play a role in the real estate market's stabilization pace. Author: Xuetao Macro Notes, Song Xuetao, Zhang Xinyue: GMTEight Editors: Wang Qiujia.