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 decline in demolitions due to the shift towards urban renewal, with average demand for homes due to demolition falling from 4.7 million units in the 2010s to 2.7 million units in the 2020s. New home prices fell in May, extending a two-year stagnation despite economic policy support measures.

Analysis

Goldman Sachs projects a significant and prolonged downturn in China's new home market, with annual demand anticipated to remain below 5 million units in the coming years, a stark contrast to the 20 million unit peak observed in 2017. This outlook suggests the property slump, which began in 2021 and has impacted a sector once contributing roughly a quarter of China's economic activity, will persist. The projection is reinforced by official data showing new home prices fell in May, continuing a two-year stagnation despite government support measures. Goldman Sachs attributes its revised, lower demand forecast to two primary factors: an expectation of negative net investment demand as existing owners sell vacant properties, and a reduction in home demand driven by demolitions, which is projected to fall from an average of 4.7 million units in the 2010s to 2.7 million units in the 2020s. This decline in demolition-driven demand stems from a governmental policy shift away from large-scale shantytown redevelopment towards urban renewal and rehabilitation, implying fewer demolitions and consequently, less need for new replacement housing.

Key Decisions for Investors

• Investors should exercise caution regarding direct investments in Chinese residential property development and ancillary industries due to the projected sustained reduction in new home demand.
• Monitor future Chinese government policy interventions closely, particularly their efficacy in stabilizing the property market, as current support measures have not yet reversed the declining price trend or significantly boosted demand.
• Consider the potential for increased net selling from investment property holders, which could further pressure prices and extend the market adjustment period, and re-evaluate exposure to companies heavily reliant on new home construction.
• Note the government's strategic shift towards urban renewal, which, while smaller in scale than previous demolition-led demand, may present niche opportunities distinct from broad new home construction.