China's new homes demand to remain well short of 2017 peak, says Goldman Sachs

Goldman Sachs projects that demand for new homes in China will remain significantly below the 2017 peak of 20 million units, estimating less than 5 million units per year in the coming years, signaling a prolonged property slump. This revision accounts for negative investment demand as owners sell vacant apartments and a decrease in demolitions due to the end of shanty town redevelopment programs. The shift in government focus towards urban renewal will further reduce average demand for homes, impacting the sector that once accounted for a quarter of China's economic activity.

Analysis

Goldman Sachs projects a severe and prolonged contraction in China's new home demand, forecasting annual sales of less than 5 million units in the coming years, a significant reduction from the 20 million unit peak observed in 2017. This outlook, indicative of a deep slump, is based on revised assumptions including negative net investment demand as property owners are expected to become net sellers of vacant apartments, and a substantial decrease in demand from demolitions following the conclusion of the 2015-18 government-led shanty town redevelopment program. The investment bank notes that the government's focus shifting towards urban renewal and rehabilitation, rather than extensive demolition, will further dampen new home demand, with demolition-driven requirements anticipated to fall from an average of 4.7 million units in the 2010s to 2.7 million units in the 2020s. This persistent weakness in the property sector, which at its peak accounted for roughly a quarter of China's economic activity, poses considerable challenges to the broader economy, underscored by official data showing a continued fall in new home prices in May, extending a two-year period of stagnation despite multiple policy support initiatives.

Key Decisions for Investors

• Investors should exercise extreme caution regarding direct investments in the Chinese residential property development sector due to the projected multi-year demand slump and persistent price weakness.
• Consider reviewing and potentially reducing exposure to ancillary industries heavily reliant on Chinese new housing construction, such as building materials and certain commodities, given the significantly diminished demand forecast.
• Closely monitor the effectiveness of ongoing and future Chinese government policy measures aimed at stabilizing the property market, as current interventions have not yet demonstrably reversed the negative trend.
• Assess the potential spillover effects of this prolonged property downturn on the broader Chinese economy, financial stability, and overall investor sentiment towards Chinese assets.