K-Shaped Divergence in China's Property Market Intensifies; Urban Renewal Unlikely to Reverse Weakness in Lower-Tier Cities
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K-Shaped Divergence in China's Property Market Intensifies; Urban Renewal Unlikely to Reverse Weakness in Lower-Tier Cities
J.P. Morgan points out that China's real estate market shows clear K-shaped divergence: tier-1 cities and the secondary housing market are showing initial signs of stabilization, but lower-tier cities continue to drag down the overall market. Under high inventory and weak credit conditions, quantitative adjustment remains prolonged.
- JPM Housing Activity Index rose slightly in May but remains sluggish; new home sales YoY decline widened to -8.6%
- MoM decline in new home prices across 70 cities stabilized at -0.20%, with tier-1 cities rising MoM +0.2% against the trend
- MoM decline in secondary home prices widened to -0.26%; tier-1 cities held steady at +0.4%, while lower-tier cities remain under pressure
- State Council released the '15th Five-Year' Urban Renewal Plan, which is more systematic, market-oriented, and execution-focused
- Policy goal shifts from 'recovery' to 'stabilizing' the market, emphasizing the construction of high-quality homes and improving people's livelihoods
- High inventory, weak household credit, and continued decline in real estate investment indicate a prolonged quantitative adjustment
Report interpretation
Overview
This J.P. Morgan research report focuses on the latest developments in China's real estate market, with the core judgment being that the current market exhibits significant K-shaped divergence: tier-1 cities and the secondary housing market show signs of local stabilization, but lower-tier cities remain weak, and the overall market has not yet entered a nationwide, sustainable recovery channel. The report also provides a detailed interpretation of the recently released '15th Five-Year' Urban Renewal Plan by the State Council, arguing that the policy is more systematic, market-oriented, and execution-driven, but its positioning is to 'stabilize' rather than 'revive' the real estate market. Through multi-dimensional data analysis, the report demonstrates that high inventory, weak household credit demand, and continued decline in real estate investment mean the market is still in a prolonged adjustment period dominated by quantitative adjustments.
Core views
The core judgment of the report can be summarized as 'K-shaped divergence, bottom not yet stable.' Demand Side and Price Performance: Although the JPM Housing Activity Index rose slightly in May, it remains at a low level overall. The YoY decline in new home sales widened from -6.5% in April to -8.6%, indicating undiminished pressure on the demand side. In terms of prices, the MoM decline in new home prices across 70 cities remained at -0.20%, appearing to stabilize, but structural divergence is extreme—new home prices in tier-1 cities rose +0.2% MoM, and secondary home prices rose +0.4% MoM, while lower-tier cities remain under pressure. New home prices have fallen 13.7% from their 2021 peak, and secondary home prices have fallen even further by 22.6%, indicating that price clearing is far from over. Supply Side and Investment: Real estate investment (FAI) fell sharply by -24.3% YoY in May, worsening further from -20.1% in April; new starts fell -22.9% YoY, and completions fell -20.2% YoY. Although the declines narrowed slightly compared to the previous month, they remain in deep negative growth territory. This indicates that developers' willingness and ability to invest remain sluggish, and supply-side contraction continues. Policy Interpretation – '15th Five-Year' Urban Renewal Plan: Released by the State Council in early June, this plan shifts from the pilot-based, gradual renovation model of the '14th Five-Year' Plan to a more systematic model, revolving around three major project categories: livelihood, development, and security. Key changes include: more ambitious targets (doubling the volume of urban dilapidated housing renovation and maintaining a high level of urban village renovation); significantly strengthened fiscal support (budgetary investment, affordable housing subsidies, special local bonds, ultra-long special sovereign bonds, tax incentives, and mention of REITs and social capital); and more flexible land policies (reuse of idle land, mixed-use development, temporary use, land conversion, etc.). However, the report emphasizes that the policy positioning is 'stabilizing' rather than 'reviving' the real estate market, with the core goal of improving people's livelihoods and promoting high-quality urban growth. Structural Market Dilemma: The report proposes that China's real estate market is trapped in a 'time inconsistency trap'—policymakers wish to improve housing affordability and reduce reliance on real estate, but slow down price clearing to avoid shrinking household wealth and impacting local governments. This leads to adjustment primarily through quantity channels (comprehensive declines in starts, sales, land acquisition, and investment) rather than price channels. While the improvement in the secondary housing market in tier-1 cities is encouraging, the broader fundamentals remain severe.
Analysis framework
J.P. Morgan's analysis follows the main line of 'data verification – structural decomposition – policy assessment – trend judgment.' At the data level, the report constructs a comprehensive housing activity index and cross-validates multi-source information such as official NBS data, Centaline Property Confidence Index, and secondary housing listing price indices to form a three-dimensional perception of market sentiment. It pays particular attention to comparative analysis by city tier (tier-1 vs. lower-tier) and property type (new homes vs. secondary homes) to identify the 'truth behind the averages.' At the policy analysis level, the report adopts a 'text comparison + tool decomposition' method, systematically comparing the '15th Five-Year' Plan with the '14th Five-Year' Plan. It assesses the degree of policy upgrade from four dimensions: target setting, project classification, funding sources, and land policies, and accurately captures the key shift in policy positioning from 'recovery' to 'stabilization.' At the trend judgment level, the report introduces the theoretical framework of the 'time inconsistency trap' to explain why market adjustment exhibits the characteristic of 'trading volume for price.' Based on this, it judges that the current improvement in tier-1 cities is merely a 'narrow, K-shaped stabilization within a prolonged quantitative adjustment,' rather than the starting point of a durable nationwide recovery.
Methodology notes
Supply and Demand Framework
The report judges the market equilibrium state by decomposing changes on the supply side (new starts, completions, investment, inventory) and the demand side (sales, credit, prices) of the housing market. The typical feature of China's current property market is a sharp contraction in supply-side investment, but even weaker demand, leading to high inventory and price pressure. This framework helps readers understand why data may show 'some warming' but the market has 'not truly improved.'
Volume-Price Split
The report distinguishes market adjustment into two paths: 'price adjustment' and 'quantity adjustment.' Normally, the market rebalances through price clearing (price cuts), but in China currently, policy support has slowed price clearing, forcing adjustment to occur primarily through quantity channels (declines in starts, sales, and investment). This prolongs the adjustment cycle and creates a 'time inconsistency' dilemma.
Inventory Cycle Analysis
The report judges market supply and demand pressure by tracking the monthly digestion cycles of construction-in-progress inventory and completed inventory. Currently, both inventory indicators are at historical highs (approximately 75 months), meaning that even if sales improve marginally, high inventory will continue to suppress prices and willingness to start new projects. This is one of the core bases for judging that 'adjustment will be prolonged.'
Policy Transmission Chain Analysis
When evaluating urban renewal policies, the report looks not only at the policy goals themselves but also at the complete transmission chain from 'central policy – fund allocation – local execution – market response.' Although the '15th Five-Year' Plan is more powerful in terms of funding and tools, the report believes its final effect depends on local execution capability and the restoration of market confidence, with potential bottlenecks in transmission.
Key data
- May New Home Sales YoY-8.6%Decline widened from -6.5% in April
- May Real Estate Investment (FAI) YoY-24.3%Accelerated decline from -20.1% in April
- May New Starts Area YoY-22.9%Narrowed from -28.2% in April
- May Completed Area YoY-20.2%Narrowed from -22.5% in April
- 70-City New Home Prices MoM-0.20%Basically flat compared to -0.19% in April
- Tier-1 City New Home Prices MoM+0.2%Rose against the trend
- Tier-1 City Secondary Home Prices MoM+0.4%Remained positive
- New Home Prices Decline from 2021 Peak-13.7%Cumulative adjustment magnitude
- Secondary Home Prices Decline from 2021 Peak-22.6%Deeper cumulative adjustment
Impact & implications
The report believes that current market signals should not change the baseline judgment. The early stabilization in the tier-1 secondary housing market is mainly supported by low inventory, high transaction volumes, improvement conversion rates, selective price increases, and wealth effects from IPOs and the stock market, but these factors are not widely replicable. Structural problems in lower-tier cities, such as high inventory, population outflow, and insufficient industrial support, remain unresolved, making synchronous recovery difficult. The introduction of the '15th Five-Year' Urban Renewal Policy may bring structural opportunities to related industry chains (construction materials, engineering machinery, urban operation services, etc.) in the short term. However, the policy is explicitly positioned as 'stabilizing' rather than 'stimulating,' and emphasizes affordable housing and revitalizing existing assets, limiting its direct pull on the commercial housing market. The report warns that as the secondary housing market continues to divert demand from new homes, a situation may emerge where 'transaction volumes stabilize but new home sales, construction, and developer investment remain weak.' This means the drag of real estate on economic growth will persist for a longer time.
Risks
- High inventory continues to suppress price recovery and willingness to start new projects
- Weak household credit demand and insufficient willingness to leverage for home purchases
- Continued decline in real estate investment drags on upstream and downstream industry chains and local government finances
- Policy 'time inconsistency' hinders price clearing, prolonging the adjustment cycle
- Diversion effect of the secondary housing market on the new home market exacerbates developers' difficulties
What to watch
- Whether transaction volumes and prices in the tier-1 secondary housing market can sustain stabilization
- Inventory digestion speed and price trends in lower-tier cities
- Specific fund disbursement and project implementation progress of urban renewal policies
- Changes in household credit data and resident home-buying confidence indices
- Marginal changes in real estate investment (FAI) and new starts area