Housing Affordability at a Decade-High; Demand Recovery Expected

Overview

HSBC has released a research report on China’s real estate sector, noting that residential affordability has rebounded to its strongest level in ten years, driven by falling home prices and declining mortgage rates. This improvement meaningfully lowers the entry barrier to homeownership—especially for the mass market—and is expected to reignite demand and stabilize home price expectations. The report identifies enhanced liquidity in the second-hand market as a pivotal turning point, which will subsequently feed into the primary market and catalyze upgrade demand. Based on this logic, the firm maintains its 'Buy' ratings on China Resources Land and Jianfa International.

Core views

Demand Side: Substantial Affordability Improvement. The report assesses housing affordability across 106 cities using two metrics: price-to-income ratio and monthly mortgage payment as a share of disposable income. Data show that both home price declines and rate cuts have collectively elevated affordability across all city tiers. In Shanghai, for example, the monthly mortgage payment for a 70-sqm apartment now accounts for approximately 50% of household disposable income—down sharply from 82% in 2021. This 50% threshold is critical: banks typically decline loan applications where monthly repayments exceed 50% of monthly income. Thus, home purchases have re-entered the reach of ordinary-income households—not just high earners. Supply Side & Transmission Mechanism: Second-Hand Market Liquidity Is Key. The report emphasizes that the contribution of mortgage interest savings to affordability is often underestimated. Assuming a ~15% correction in home prices, interest savings alone reduce monthly payments by 42%. This broad-based and significant improvement in affordability will strengthen second-hand market liquidity and restore household confidence in homeownership. Once the second-hand market regains vitality, the property upgrade chain will reactivate, releasing pent-up demand for new upgrade homes. In supply-constrained cities, this transmission effect—from second-hand to primary—is expected to materialize more rapidly. Investment Strategy: Preference for High-Quality Developers. Given these improving fundamentals, the report continues to favor developers with deep, high-quality project pipelines. China Resources Land (1109.HK) and Jianfa International (1908.HK) are both rated 'Buy'. Jianfa International, in particular, still has room to catch up year-to-date and offers relatively higher upside potential.

Analysis framework

The report adopts an integrated analytical framework combining 'volume-price decomposition' and 'supply-demand analysis'. First, it quantifies the impact of home price declines and interest rate cuts on household purchasing power using two core metrics—price-to-income ratio and mortgage burden ratio—with special emphasis on the sensitivity of the interest-rate factor in Tier-1 cities. Second, applying a 'value-chain transmission' logic, it analyzes how renewed liquidity in the second-hand (existing-home) market serves as a leading indicator for improved upgrade demand in the primary (new-home) market. Finally, valuation modeling (NAV discounting) is used to identify leading developers possessing pricing power and execution capability in the next cycle.

Methodology notes

• Industry/sector analysis frameworkSupply-demand framework

  Housing affordability analysis

  Affordability is measured via price-to-income ratio and mortgage payment-to-disposable-income ratio, reflecting actual household purchasing power. The report notes that when these ratios revert to historical lows, they often signal a bottoming out of demand.

• Industry/sector analysis frameworkUpstream-Midstream-Downstream Value Chain Transmission

  Second-hand-to-primary transmission effect

  In real estate, active second-hand transactions are a prerequisite for primary sales. Only when owners can successfully sell their existing homes do they gain both the capital and eligibility to purchase new homes (upgrade demand). Hence, second-hand market liquidity is a key leading indicator of primary market health.

• Valuation methodologyNAV (Net Asset Value) Method

  NAV discount valuation

  Developers are valued using the NAV method—calculating total asset value (including development and investment properties) minus net debt, then applying a discount or premium based on operational strength and track record.

Asset mapping & comparison

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

• China Resources Land (1109.HK)

  Beneficiary: Strong recurrent income and proven execution track record

  Strengths

  Strengthening sales momentum, robust recurring income, solid execution history, and a clear path to margin recovery

  Comparison

  Greater potential to unlock portfolio value versus peers

  Risks

  Failure to sustain sales momentum, margins below expectations, slowdown in shopping mall operations, dividend stability risk

• Jianfa International (1908.HK)

  Beneficiary: Young land bank and high earnings visibility

  Strengths

  Young land bank, distinctive competitive advantages, encouraging margin recovery trend, relatively high earnings visibility

  Weaknesses

  Year-to-date share price still has catching-up potential

  Comparison

  Potentially greater upside than China Resources Land (catch-up rationale)

  Risks

  Slower land acquisition, sharp deterioration in sales, significant margin compression, dilutive rights issue risk, joint venture project risks

Key data

• Shanghai: Monthly Mortgage Payment for 70-sqm Apartment as % of Disposable Income50%Current level, down sharply from 82% in 2021—now below banks’ lending threshold
• Reduction in Monthly Mortgage Interest Payments42%Assuming ~15% home price correction; interest reduction contributes substantially to affordability gains
• Shanghai: Share of Second-Hand Home Transactions57%Second-hand market dominates Shanghai’s transaction volume; its activity is critical
• Shanghai: Share of Transactions for Homes Priced Below RMB 3M64%Mass-market homes drive second-hand volume and benefit most directly from improved affordability
• China Resources Land Target PriceHKD 43.80Implies ~25% upside, based on NAV discounting
• Jianfa International Target PriceHKD 19.90Implies ~25% upside, based on NAV discounting

Impact & implications

The report concludes that this historic improvement in housing affordability will provide a robust foundation for real estate demand—especially in the mass market—helping stabilize home price expectations and driving primary market absorption through stronger second-hand activity. For developers, those with high-quality land banks, strong sales execution, and pricing power will benefit first. Investors should closely monitor flagship project sales performance and market dynamics in supply-constrained cities.

Risks

• Uncertainty around macroeconomic conditions and real estate policy
• Developers failing to sustain sales momentum or delivering margins below expectations
• Slower land acquisition or joint venture project risks
• Significant dilution from deeply discounted rights issues

What to watch

• Sustained sales performance of developers’ flagship projects
• Speed of transmission from second-hand to primary markets in supply-constrained cities
• Persistence of second-hand market transaction volumes