China has been on a long property cycle correction; although not the longest fall compared to the 97-03 cycle, it certainly feels like the deepest drop experienced - down 39% from the 2021 peak in Shenzhen for example:
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The drop has triggered a lot of support measures in recent
months, ranging from policy relaxations to rate cuts. Whilst prices are now
back to 2015 levels (red line above), price-to-income ratios have
seen even deeper correction - the price-to-disposable income ratio (green
line above) is now back to 2007 levels, a full 18-year roundtrip! The
less relevant price-to-per-capita-GDP measure has returned to 2015, similar to
the price index correction (blue line).
If we looked further back to the Asian Crisis period, the
drop in price-income ratios has taken us to even the 1999-2001 period. So are
we near a bottom yet?
Cycle bottom near, but not there yet
The market has recently shown some signs of recovery, as the
first shoots of rebound has appeared in price statistics - the latest monthly
YoY numbers has registered one recovery (green bar below), after
the longest period of all cities reporting drops (red bars) continuously
since 2024:
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Shenzhen price moves (red line above) has always
been a lead indicator of national trends - each time the line turns up, the
number of cities reporting price rises increase. This time however, the SZ line
has not made a reversal yet, suggesting perhaps the odd city rising in the
latest monthly stats is but 'counter-trend rallies' rather than trend
changes...
This assessment is corroborated by stock analysts out there
too, see article 1 for details. The still negative outlook is
justified given still very strong global headwinds in both trade wars (article
3) and proxy hot wars, which can both flare up further. On the micro side,
the inventory glut remains in need of digesting:
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for more charts see here |
Both geopolitics and weak retail appetite has been weighing
on China's business sentiment, which has stayed in contracting territory in Q2,
following a longer period of drops for most of 2023-24:
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As a result, both consumer (blue line below) and
producer prices stayed neutral (at best) to negative:
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The saving grace has been the aggressive rate cuts carried
out by the PBoC, taking funding costs to levels significantly below HK/US
levels now:
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However, the pressure from rate arb is now mounting,
especially when most Western nations are seeing their long bonds crash driving
up rates. We don't expect this trend to end any time soon, and as a result,
China's near record discount vs TBs could be due for mean reversion:
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What is the bullish case?
For Shenzhen specifically, the strong momentum of
Hongkongers consuming up north seem to be providing some support (article 2),
and as the porosity of the SZ-HK border continue to increase, price
equalisation could have some further legs to run, benefiting the prices there
(more than most other cities).
The rate cuts and increasing rental yields are also tilting
fundamentals in favour of owning for end users, and buying for investors. The
negative yield gap (currently around 2%, see blue lines below)
for home owners however could recover more before buying demand returns in
numbers:
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As a result, we expect likely another 100-200bps of
narrowing - either from rental growth or further rate cuts - before prices
begin recovering meaningfully. The timing seems to be more likely 2027 on
current trajectories from the chart above.
=====================Article 1====================
Goldman Sachs Says China Home Prices May Drop 10% Before 2027 Market Bottom
2025/06/26 | Iris Hong
China’s property slump could extend into 2027 with a further 10 percent decline in home prices, as policymakers remain cautious about easing measures, according to a Goldman Sachs report released on Wednesday.
[…]
=====================Article 2====================
Benefits of Shenzhen/Hong Kong tourism mainly flow one way
2025/06/12
[…]
While Hong Kong tourists travel north to take advantage of cheaper hotels and restaurants, Mainland tourists arriving from Shenzhen are more inclined to take short trips and focus on sightseeing rather than shopping and restaurants. Shenzhen has now overtaken Macau as the most popular weekend destination for Hong Kong residents.
[…]
=====================Article 3====================
Trump Says He'll Set 50 Percent Tariff on Copper
2025/07/08
[…]
“Today, we’re doing copper,” Trump said at a July 8 Cabinet
meeting in front of reporters. “I believe the tariff on copper, we’re going to
make it 50 percent.”
[…]
https://www.theepochtimes.com/business/trump-to-impose-50-percent-tariff-on-copper-5884328
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