Capital Economics forecasts tumbling real estate construction in the years ahead for China.
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Capital Economics said the “unavoidable structural decline” in China’s property sector has only just begun.
Property sales and starts have collapsed, and construction could fall by half in the years ahead.
Beijing has taken some steps to boost construction, but that may not last.
Several years in and China’s prolonged real estate slump has been well-documented, but the landscape may be about to deteriorate further as construction enters a deeper correction, Capital Economics said in a note Wednesday.
Property sales and starts have tumbled, yet Beijing has been able to support construction activity by ramping up investment in the sector and pressuring developers to complete their work.
“A variety of approaches suggest that a sustainable level of residential construction activity is about half of what’s underway today, given China’s demographics and its need to replace aging housing stock,” strategists wrote in a Wednesday note, adding that “property construction still has a long way to fall.”
Since peaking in 2022, floor area under construction has slipped a mere 3%, as shown in the chart below.
Residential real estate activity in China
Capital Economics, CEIC
Sizable infrastructure support has prevented construction from falling as much as anticipated. In fact, investment in infrastructure has expanded at a “reasonably rapid rate,” the Capital Economics team said. It’s plausible, in their view, that construction output would have softened further without it.
Meanwhile, Beijing’s pressure on builders seems to have worked so far. Last year marked the first year since 1997 that reported residential property completions outpaced project starts.
As Capital Economics highlights, real estate construction remains an opaque measurement in China. Much of the country’s property data omit details that could otherwise help paint a clearer picture, and that could also explain the apparent lack of weakness in new building.
Construction’s impact on economic growth
Real estate contributed roughly 1.5 percentage points to China’s annual economic growth before the contraction began, according to the research firm. But that weakness has so far come without a meaningful drop in construction.
When similar steep drop-offs have occurred in other countries, it usually takes place over three or four years. In Capital Economics’ view, Beijing will drag it out longer so that it doesn’t fully materialize until 2030.
That ultimately could crimp China’s GDP by about 1% lower across the rest of the decade compared to an outlook without as dramatic a construction slump.
In any case, despite China’s efforts — sector investment and pressure on developers — the strategists said it’s unlikely that Beijing can offset the underlying weakness in property demand for much longer. Ultimately, China is attempting to use cyclical tools to solve structural issues.
Much of the infrastructure investments are financed by local governments who face diminishing returns and other financial headwinds. Demographic challenges, too, including a falling population and stalling urbanization, Capital Economics said, suggest weaker property demand in the years ahead.
“In sum, while property sales and project starts have collapsed, and many developers have been driven into bankruptcy, the full impact of China’s property crisis on real economic activity has not yet been felt,” Capital Economics strategists said.
