China’s Housing Prices Continue to Decline, Pressuring the European Luxury Goods Industry

Overview

This research report highlights the continued decline in China’s housing prices. In May, second-hand home prices fell 0.5% month-on-month (–11.3% year-on-year), with 93% of the 85 surveyed cities experiencing month-on-month declines, and the pace of decline accelerating in 64%. Although prices in Tier-1 cities remained largely flat, the broader market remains weak, exerting downward pressure on the European luxury goods industry. Chinese demand accounts for more than 30% of total consumption in this sector, and with over 70% of Chinese household wealth concentrated in real estate, falling home prices continue to weigh on the luxury goods market.

Core views

China’s housing prices continue to fall, with second-hand home prices dropping 0.5% month-on-month in May (–11.3% year-on-year), faster than the 0.4% decline in April. Among the 85 surveyed cities, 93% reported month-on-month price drops, and the pace of decline accelerated in 64%, indicating that the softening trend has broadened. Prices in Tier-1 cities (Beijing, Shanghai, Shenzhen, Guangzhou) remained largely unchanged (–0.1% month-on-month), supported by active second-hand transactions and policy easing. Since peaking in June 2021, second-hand home prices have cumulatively fallen by 38%. Morgan Stanley’s China Real Estate team maintains a cautious stance, recommending investors wait for additional signs of market recovery before turning constructive. With over 70% of Chinese household wealth tied to real estate and Chinese demand accounting for more than 30% of total luxury goods consumption, the ongoing decline in housing prices continues to pose significant pressure on the luxury goods sector.

Analysis framework

The report employs a supply-and-demand framework to analyze China’s real estate market, tracking second-hand home price data across 85 sample cities to assess the breadth and depth of price changes. It compares Tier-1 and non-Tier-1 cities to evaluate market differentiation, while linking the real estate market to demand in the European luxury goods industry through an analysis of how China’s wealth distribution affects consumer spending capacity.

Methodology notes

• Company Fundamentals and Financial Framework

  High proportion of real estate in Chinese household wealth

  More than 70% of Chinese household wealth is concentrated in real estate, meaning fluctuations in housing prices significantly impact consumer spending, particularly among high-net-worth individuals who drive luxury goods demand.

Key data

• May Second-Hand Home Price Change (Month-on-Month)-0.5%Year-on-Year: –11.3%
• Proportion of Sample Cities with Monthly Price Declines93%Decline accelerated in 64% of cities
• Tier-1 City Price Change (Month-on-Month)-0.1%Beijing, Shanghai, Shenzhen, Guangzhou
• Cumulative Decline in Second-Hand Home Prices-38%Since the June 2021 peak

Impact & implications

The continued decline in China’s housing prices exerts sustained pressure on the European luxury goods industry, as Chinese demand accounts for more than 30% of total consumption in this sector and over 70% of Chinese household wealth is held in real estate. Falling home prices may reduce the purchasing power of high-net-worth consumers, thereby dampening luxury sales. Morgan Stanley advises investors to monitor developments in China’s real estate market and their potential implications for luxury goods demand.