The chart I am about to show rather attracted my attention over the weekend. After all we have been looking at the theme of weak Chinese house prices for some years now. For newer readers net exporters ( China, Germany and Japan) all tend to have weak domestic consumption. In China deficient domestic demand was such an issue they took a leaf out of the playbook of us Western Capitalist Imperialists and encouraged a housing boom to benefit from Wealth Effects which would boost consumption. That is the theory at any rate. But boom turned to bust as we have been following and below is a new version of that.
The chart is from @Hedgeye and came from the St. Louis Fed or Fred as it is known.
China’s Real Estate Market has erased all gains from the last 20 years
There is a clear lost decade style theme here as that has a touch of The Vapors.
I’m turning JapaneseI think I’m turning JapaneseI really think so.
There are two lost decade counts you can do here as the first is the chart overall and the second is to count from the pumping it up phase which began around 2016. The house price party began around 94 on the second count went to 113 and is now at 85.13. Care is needed with this sort of thing because it matters how reliable the inflation measure is. Personally I prefer wages as a deflator. But we know that in recent times Chinese official inflation has been relatively and absolutely low.
Switching to last week’s official release we were told this.
Data released on Wednesday by the China Index Academy showed that secondary-market home prices across 100 major Chinese cities fell 0.42% month-on-month in June, to an average of 12,639 yuan (US$1,750) per square meter. Of those cities, 88 recorded declines while only 12 saw gains. ( Asia Times)
It was in musical terms a case of and the beat goes on.
The secondary market slide was broad-based across city tiers. In June, first-tier city secondary home prices fell 6.95% year-on-year. Second-tier cities fared worse, dropping 8.21% on the year, while smaller third- and fourth-tier cities fell 7.48% year-on-year. (Asia Times)
The geographical breakdown is below.
Among the 10 largest cities, Nanjing and Wuhan posted the steepest year-on-year declines in June, with secondary market prices dropping 11.45% and 10.89%, respectively. Beijing, Tianjin, Guangzhou and Chongqing all saw falls of between 8% and 10%. Hangzhou, Shanghai, Chengdu and Shenzhen recorded year-on-year declines of between 5% and 8% in June. Shenzhen performed best among the ten cities, with a 5.27% drop compared with a year earlier.
Analysis
There has been some rather fevered analysis of this on social media as you might expect with the majority missing out a big theme of my work. Which is that first-time buyers and those trading up will welcome this as the cost of living has just got cheaper via lower house prices. Putting it another way buying a home has got more affordable.Indeed if we look back a year to this from Standard and Poors there are other measures which are cheap.
China’s central bank cut two key lending reference rates for the first time in seven months, pushing them to new all-time lows.
The People’s Bank of China (PBOC) on May 20 cut its one-year loan prime rate (LPR), referenced for general lending, to 3.0% from 3.1%. The five-year rate, the benchmark for mortgage lending, was cut to 3.5% from 3.6%, according to the PBOC’s release.
The other side of the coin is existing home owners. If you bought twenty years ago you have been on a Talking Heads style road to nowhere in house price terms although if you have a mortgage you will have built up some equity. If you bought around the 2021/22 peak then you now have some quite considerable negative equity which will take some time to pay off.Sadly some took on extra debt thinking that the only way was up for house prices and that has gone very wrong now. Indeed as I pointed out on the 9th of January builders also cut corners in the dash.
A nationwide review by Zhijian Cloud, a construction quality data platform, based on third-party inspections of more than 100,000 newly completed homes found that nearly two-thirds of units delivered in 2025 were rated “poor quality”, roughly six times the share in 2022.
So the hoped for wealth effects have gone and that was before the way that we saw developers implode of which the headline case is below. From the 4th of October 2021.
Shares of China Evergrande Group, the world’s most indebted property developer, and its property management arm were suspended on Monday in Hong Kong ahead of a potential sale of a controlling stake in the property management business, signalling a move to dispose of core assets as it seeks to stave off a debt crisis. ( South China Morning Post)
Chinese equity market
There is an interesting line of argument on this too.
Chinese Stocks are underperforming the rest of the world by the most in a quarter century. ( Barchart)
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Then they go onto say that “Sluggish economy, weak consumer demand has weighed on Chinese equities. Should that be so then the Japanese stick market should be in a mess as its economy is much more sluggish than China’s and yet the Nikkei 225 closed today just shy of 70.000 and is up around 75% over the past year. In my home country the UK the FTSE 100 rallied over 10.700 earlier today and ur economy is also much more sluggish than China.
Demographic Problems
This was highlighted last week by changes to the education system.
The decline in the compulsory school-age population has created a valuable “window of opportunity” for smaller classes, Ding Changfa, an associate professor at Xiamen University’s School of Economics, told Yicai.
That is one way of putting a positive spin on the situation.
Following the end of China’s long-running family planning policy, annual births briefly rebounded to 17.86 million in 2016. The recovery proved short-lived, however, with births subsequently resuming their decline and falling to 7.92 million last year. (Yicai)
Which means this for the education system.
The falling birth rate has already begun to reshape China’s education system. The number of elementary school students likely peaked in 2023, while the ranks of junior high school pupils is expected to peak this year, according to a report jointly released by the Ministry of Education and the National Bureau of Statistics last November. The high school and higher education student populations are projected to crest in 2029 and 2032, respectively.
Those who recall the period of the “empty cities” may need to mull them getting emptier.
Comment
People often forget that economics is often about switches. The same move benefits one and hinders another. We can continue our journey today into another consequence of the house price bust which is the extra push into manufacturing.
China’s manufacturing sector capped its strongest quarter in almost six years, a private gauge suggests, even as growth eased slightly in June and the underlying economy remains fragile.
It has been quite a success but consumption not so much.
Retail sales and investment both fell in May at rates unseen since the pandemic. (Bloomberg)