China's property slump this year is looking much worse than expected, S&P says

S&P Global Ratings has significantly revised its outlook for China's real estate market, now projecting new home sales to fall by a sharper 8% in 2025 to 8.8-9 trillion yuan, extending the slump for a fifth consecutive year. This downgrade from an earlier 3% decline forecast is primarily due to fragile homebuyer sentiment and Beijing's less aggressive policy easing than anticipated. The market, which has halved since 2021, faces an elusive turnaround with further sales and price declines expected in 2026, despite incremental government support and some eased purchase restrictions.

Analysis

S&P Global Ratings has significantly downgraded its outlook for China's real estate market, now forecasting an 8% decline in new home sales for 2025, reaching 8.8-9 trillion yuan. This marks a substantial revision from its prior 3% drop prediction and extends the industry slump into its fifth consecutive year. The market has effectively halved since 2021's 18.2 trillion yuan peak, indicating a prolonged and severe contraction.

The primary drivers for this pessimistic revision are "fragile homebuyers' sentiment" and a less aggressive policy easing stance from Beijing than anticipated. The five-year loan prime rate, a key mortgage benchmark, has only seen a 10 basis point reduction this year, significantly less than the 60 basis points in 2024, suggesting a cautious approach to stimulus despite the ongoing downturn. Unsold housing inventory also climbed to 762 million square meters by August, up from 753 million in December 2024, exacerbating supply-demand imbalances.

S&P projects further declines, with sales expected to fall another 6-7% in 2026 and primary home prices decreasing by 1.5-2.5%. While Beijing has acknowledged the slump and implemented some measures, such as easing purchase restrictions in city outskirts and a "whitelist" for unfinished projects, these have not yet restored broad confidence. A minor positive signal was a 0.4% year-over-year sales increase for top 100 developers in the month following August's policy adjustments, hinting at potential stabilization in specific segments.

Key Decisions for Investors

• Investors should closely monitor further policy easing from Beijing, particularly broader interest rate cuts or significant demand-side stimulus, as current measures appear insufficient to reverse the negative sentiment.
• Given the prolonged slump and fragile demand, assess the financial health and liquidity of individual developers, prioritizing those with strong balance sheets and diversified revenue streams.
• While short-term prospects remain challenging, consider the potential for a "smaller, healthier, and more resilient sector" in the long term, focusing on developers likely to survive and consolidate market share.
• Evaluate exposure to developers with significant presence in first-tier cities, as demand stabilization in these key urban centers is crucial for a sustainable recovery trajectory.