China house prices are still falling, continuing to pressure expectations for European luxury demand

Overview

The report approaches the topic through the evolution of China’s real estate market and evaluates its potential impact on the European luxury goods sector. It notes that China’s housing market remained weak in April, with second-hand home prices continuing to decline year-over-year. Although there was modest improvement in sales and prices in some top-tier cities, overall recovery has not yet spread broadly. Because China contributes meaningfully to total European luxury goods spend and Chinese household wealth is highly dependent on real estate, lower house prices and fragile consumer sentiment could remain a key risk for investors tracking this sector.

Core views

The central view is that China’s housing market has not formed a broad recovery; short-term improvements are concentrated in only a few high-quality cities. Secondary housing listings remain elevated and new-home inventory is still high, while rents continue to decline and consumer confidence remains fragile. Morgan Stanley's China real estate team expects that as policy support wanes, housing sales in affected cities may cool over the coming months, but year-over-year declines may still show some improvement due to a lower base. For European luxury goods, weakness in China real estate may weigh on demand expectations through wealth effect and confidence channels.

Analysis framework

The report uses macro-to-industry transmission analysis: it first tracks China’s second-hand home prices, transactions, listing volume, new-home inventory, rents, and real estate investment, then combines these with China’s share of total European luxury consumption and Chinese household wealth structure to judge transmission risk to luxury spending. Charts use June 2021 as the index base to track downward trends in home prices, residential sales area, and real estate investment.

Methodology notes

• Macro-to-industry transmissionReal Estate Wealth Effect Analysis

  Changes in China real estate prices affect household wealth sentiment, consumer confidence, and discretionary spending willingness, thereby influencing European luxury demand.

  The report emphasizes that China accounts for over 30% of total European luxury goods consumption, and more than 70% of Chinese household wealth is in real estate, so persistent price declines become a negative variable for the luxury sector through a wealth-effect channel.

• Industry momentum trackingHigh-frequency monitoring of the secondary housing market

  The quality of real estate recovery is assessed through month-over-month and year-over-year changes in secondary house prices, the breadth of dispersion across sample cities, top-tier city performance, and listing activity.

  In April, among 85 sample cities, secondary house prices fell 0.4% month-over-month and 11.8% year-over-year. Although the decline narrowed versus March, most cities still recorded monthly declines and the breadth of recovery remained unclear.

Asset mapping & comparison

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

• European Luxury Goods equities

  China real estate influences Chinese luxury demand through the wealth effect and consumer sentiment, which in turn affects revenue expectations for European luxury companies.

  Strengths

  China accounts for more than 30% of total European luxury goods consumption, so if real estate stabilizes, the sector has high sensitivity to recovery in China.

  Weaknesses

  China’s housing market remains relatively weak, with household wealth highly dependent on real estate and consumption confidence potentially constrained by falling home prices.

  Comparison

  Compared with the limited improvement in a few top-tier cities, more cities nationally have not shown a clear spread of recovery, so demand fundamentals are still unstable.

  Risks

  Further house price declines, diminishing policy effects, cooling sales, persistently high listings and inventories, rent deterioration, and fragile consumer sentiment.

• China Property market indicators

  Serve as a leading or synchronous signal for European luxury demand.

  Strengths

  Secondary housing activity in top-tier cities has been stronger than expected since March, especially in Shanghai and Beijing.

  Weaknesses

  Recovery has not spread; secondary housing listing volumes and new-home inventories remain elevated.

  Comparison

  The April secondary house price decline narrowed versus March, but year-over-year remains -11.8%, so the market is still in a downtrend overall.

  Risks

  Housing sales may cool again in coming months as policy influence fades.

Key data

• April secondary housing transaction pricesMoM -0.4%, YoY -11.8%85 sample cities; the MoM decline in March was -0.6%, and the April decline narrowed slightly.
• Four-month cumulative secondary housing price performanceYoY -1.8%The report refers to the 4M26 year-over-year basis.
• Share of sample cities with price declines91%In April, the majority of sample cities still recorded month-over-month declines.
• Share of cities with widening declines19%Lower than March's 84%, indicating a moderation in the pace of price declines.
• March new home pricesMoM -0.2%, YoY -3.0%April new home price data had not yet been released at the time of reporting; February MoM was -0.8%.
• China demand as share of total European luxury spend>30%Used to illustrate the importance of Chinese demand for the European luxury sector.
• Share of Chinese household wealth in real estate>70%Used to explain the potential transmission of real estate prices to confidence and luxury demand.
• Sector viewIn-LineThe European luxury goods sector rating disclosed in the report.

Impact & implications

For investors, China’s real estate market remains a major external variable for the European luxury goods segment. If house prices continue to fall, listing volumes and inventories stay elevated, and sentiment remains fragile, the recovery in luxury consumption may lack a solid foundation. If improved transactions in top-tier cities spread to more cities and help stabilize both prices and rents, concerns about China demand could be reduced. Current evidence supports maintaining a cautious stance rather than turning constructive ahead of broader confirmation.

Risks

• Chinese house prices continue to fall and weaken the household wealth effect.
• Recovery in top-tier cities fails to spread to additional cities.
• Secondary housing listing volumes and new-home inventory remain elevated.
• Weak household sentiment and continued rent declines further hurt consumption confidence.
• Housing sales cool again once policy support loses force.
• High dependence of the European luxury sector on China demand could pressure valuation and earnings expectations if demand recovery disappoints.

What to watch

• Whether April-onward month-over-month declines in secondary housing prices continue to narrow or turn positive.
• Whether transaction improvements in Shanghai, Beijing, and other top-tier cities spread to more cities.
• Whether secondary housing listings and new-home inventories decline.
• Whether rents and household sentiment stabilize.
• Chinese luxury consumption data and management commentary from European luxury companies on China demand.
• Whether policy support can deliver sustained, rather than only temporary, sales improvement.