China's housing market cools again, putting pressure on European luxury demand

Overview

The report uses July data from China's residential market as an entry point to assess its impact on the European luxury goods sector. Listed prices of existing homes in China continued to decline, while transaction growth, store visits, and resident sentiment all appeared weak, and listed inventory continued to rise. Because Chinese demand accounts for more than 30% of global luxury consumption and real estate makes up the main portion of Chinese household wealth, shrinking housing assets may weaken high-end consumption through wealth-effect and confidence channels. Morgan Stanley maintains an In-Line view on the European luxury goods sector, but remains cautious on the near-term Chinese demand environment.

Core views

China's housing market remains in a divergent and weak recovery phase. July's price decline showed no substantive improvement, with the narrower year-over-year decline mainly due to a low base rather than stronger month-over-month momentum; the previous relative strength of tier-one cities also began to weaken. Continued slowing in transaction volume growth, rising listings, and declining store visits suggest that sales and prices may come under further pressure in August to September. Meanwhile, the positive wealth effect from A-shares has weakened significantly and is difficult to offset the loss in housing asset value, so growth risks for the European luxury goods sector among Chinese consumers remain skewed to the downside.

Analysis framework

The report combines existing-home prices across 85 cities, transaction volumes in 25 major cities, listings in about 50 cities, and brokerage store-visit data in 45 cities to compare month-over-month, year-over-year, and changes from historical peaks. It also contrasts losses in housing asset value with changes in A-share market capitalization, and analyzes the transmission from the housing market to European luxury demand through China's share of global luxury spending and the share of real estate in household wealth.

Methodology notes

• Macro transmissionHousing wealth effect

  Changes in housing asset values affect discretionary consumption through household balance sheets and consumer confidence.

  More than 70% of Chinese household wealth is in real estate, while Chinese consumers contribute more than 30% of total European luxury goods spending, so falling home prices may create significant indirect pressure on luxury consumption.

• Market structureDivergent recovery

  Divergence in real estate performance across different city tiers and supply-demand conditions.

  The overall market continues to weaken, but a small number of tier-one cities with more favorable supply-demand conditions may maintain mild but weakening upward performance, showing clear divergence.

• Data assessmentDecomposition of month-over-month momentum and base effects

  Distinguishing whether year-over-year improvement comes from genuine strengthening in momentum or a lower comparison base.

  Although the year-over-year decline in home prices narrowed, monthly month-over-month declines have remained around 0.4% to 0.7% since the beginning of the year, indicating that the year-over-year improvement mainly comes from favorable base effects while underlying momentum remains weak.

• Cross-asset comparisonAnalysis of housing and equity wealth offsets

  Comparing the opposing effects of real estate value losses and equity market capitalization gains on household wealth.

  Since December 2024, housing market value has declined by about RMB 41 trillion, while A-share market capitalization increased by about RMB 24 trillion over the same period; from the beginning of the year to July, the changes were roughly a decline of RMB 7 trillion and an increase of RMB 2 trillion, respectively, meaning equity wealth can no longer fully offset housing losses.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• European luxury equities

  Downstream risk exposure to China's housing wealth effect

  Strengths

  Chinese consumers remain an important source of demand for the global luxury goods market, and the long-term demand base has strategic significance.

  Weaknesses

  Chinese demand accounts for more than 30% of total sector spending and is relatively sensitive to shrinking household wealth and declining consumer confidence.

  Comparison

  Compared with the continued shrinkage of housing assets, the offsetting effect from A-share wealth growth has weakened significantly.

  Risks

  Chinese sales falling short of expectations, downward revisions to earnings forecasts, valuation pressure, and further divergence in performance among different brands.

• China existing residential housing

  Core leading variable for the consumption wealth effect

  Strengths

  A small number of tier-one cities with more favorable supply-demand conditions may maintain relative resilience.

  Weaknesses

  Prices are broadly falling, transaction growth is slowing, listings are increasing, and resident sentiment remains fragile.

  Comparison

  The average month-over-month decline in tier-one cities widened from 0.1% in June to 0.4% in July, reversing some of their previous relative strength.

  Risks

  Continued declines in listed prices may exert greater pressure on actual transaction prices in the second half of the year.

• China A-shares

  Potential offsetting channel for housing wealth losses

  Strengths

  Market capitalization growth since 2024 had partially buffered the impact of the real estate downturn on household wealth.

  Weaknesses

  From the beginning of the year to July, total market capitalization increased by only about RMB 2 trillion, and the technology-heavy Shenzhen Index has fallen about 17% from its June 22 high.

  Comparison

  Over the same period, housing asset value decreased by about RMB 7 trillion, making the positive change in the stock market clearly insufficient.

  Risks

  If the stock market falls further, the housing and equity wealth effects may both weaken, intensifying pressure on discretionary consumption.

Key data

• July listed existing-home pricesDown 0.5% month over month and down 9.6% year over yearCovering 85 sample cities, with the month-over-month decline unchanged from June.
• Cumulative decline from historical peakAbout 38%Relative to the June 2021 peak.
• Share of cities with price declinesAbout 95%Refers to sample cities that recorded month-over-month declines in existing-home prices in July.
• July price changes in tier-one citiesAverage month-over-month decline of 0.4%The average month-over-month decline was 0.1% in June, and declines widened in all tier-one cities in July.
• Existing-home transaction volume in 25 major citiesUp about 9% year over year in JulyBelow 30% in April, 25% in May, and about 10% in June.
• Total existing-home listingsUp 0.5% month over month in JulyCovering about 50 sample cities, with listings increasing month over month in more than 70% of cities.
• Brokerage store visitsDown 6% month over month and flat year over yearCovering 45 sample cities; the report believes seasonality is the main reason.
• China's share of luxury demandMore than 30% of total global spendingReflects the European luxury goods sector's relatively high dependence on Chinese consumers.
• Real estate share of Chinese household wealthMore than 70%Changes in home prices have an important impact on residents' sense of wealth and consumer confidence.
• Change in housing asset value from the beginning of the year to JulyDown about RMB 7 trillionOver the same period, total A-share market capitalization increased by only about RMB 2 trillion.

Impact & implications

The continued cooling of the housing market means Chinese consumers' sense of wealth and willingness to spend may come under further pressure, creating an unfavorable external environment for European luxury sales. Year-over-year data appear to improve because of a low base, but persistent month-over-month price declines, slowing transaction growth, and rising listed inventory show that actual momentum remains weak. If home-price declines widen and transaction growth continues to slow in August to September, Chinese revenue expectations, valuations, and market sentiment for luxury companies may all come under pressure. A small number of cities with better supply-demand conditions, as well as companies with stronger brand power and more resilient customer bases, may be relatively more defensive, but the report does not upgrade the industry view on this basis.

Risks

• The month-over-month decline in existing-home prices may widen in August to September, further weakening households' sense of wealth.
• Transaction volume growth may fall to low- to mid-single digits, making it difficult to improve significantly even if the comparison base turns lower.
• Continued increases in listed inventory may add downward pressure on actual transaction prices.
• Resident confidence remains fragile, and the seasonal off-season may amplify weakness in sales and store visits.
• If A-shares continue to pull back, their ability to offset housing wealth losses will weaken further.
• The European luxury goods sector has high exposure to Chinese demand, and weak Chinese macro consumption may lead to downward revisions to revenue and earnings forecasts.
• Performance across different cities and brands may diverge significantly, and aggregate data may not accurately represent a single company or region.

What to watch

• Whether the month-over-month decline in existing-home prices across 85 sample cities widens in August to September.
• Whether year-over-year growth in existing-home transaction volume across 25 major cities falls to low- to mid-single digits.
• Whether tier-one cities can again show relative resilience, and the number of cities with better supply-demand conditions.
• Changes in total existing-home listings, the share of cities reaching record highs, and new listings.
• Whether brokerage store visits and resident home-buying sentiment can recover after the summer.
• The speed at which declines in listed housing prices are transmitted to actual transaction prices.
• Whether total A-share market capitalization and the Shenzhen Index can again provide a positive wealth effect.
• China sales, foot traffic, average transaction value, and inventory trends disclosed by European luxury companies.