China’s years long property sector crisis has only deepened, compounded by the country’s demise of a birth rate and its victorious march toward a shrinking population. In the past two years, nearly 36,000 kindergartens have closed their doors across the country. This large drop shines a light on the big drop in preschool enrollment. Based on the most recent available data, China has shrunk by more than 10 million students from its once bustling preschools. This deeply concerning trend has deep implications for the future demographic and housing demand dynamic.
As Goldman Sachs economists put it, our population is “going off a demographic cliff.” This is clearly unsustainable. That will lead to a significant decline in future housing demand for years to come. China’s population is projected to fall to less than 1.39 billion by 2035, 20 million fewer than today’s total of 1.41 billion (World Bank). This momentous shift in the commercial development landscape will have far-reaching impacts on the commercial real estate industry.
As of 2023, the amount of children starting primary school in China was the largest it had been in more than 20 years. Unfortunately, this positive trend was brief, as early indicators point to a decline in enrollment for 2024. This increase and decrease highlights the evolving demographic trends impacting China’s education and housing sectors.
According to Goldman Sachs, China’s declining population will reduce the need for new homes by 0.5 million units per year throughout the 2020s. This continued drop will have profound consequences for the area’s housing market. The experts’ baseline forecast predicts a cumulative loss growing to an astounding 1.4 million units annually by the 2030s. This battle is a troubling sign of what’s to come for the real estate market in the years ahead.
The real estate industry is already living under the reality these demographic trends. In May, new home prices in China plunged at their fastest rate in seven months, signaling ongoing struggles within the sector. New home sales are experiencing an especially steep decline, at least according to data from 30 large cities. For the first 15 days, sales were down 11% year-over-year.
The challenges currently facing China’s real estate sector are not new. Sadly, since late 2020 the real estate market has been plagued by a severe recession. Despite commendable government efforts to stabilize the industry, their effects have been largely negligible. Combined with stagnant incomes and an increasingly precarious job market, these factors discourage young people from feeling stable enough to start a family. This reluctance, coupled with a lacklustre social security scheme, adds to the pressure in a sizzling property market.
William Wu noted that despite these challenges, “some of this decline will be offset by continued urbanization and housing upgrade demand.” This declaration is meant to emphasize that although demographic factors are acting as headwinds on housing demand, other trends are working to alleviate the pressure.
Goldman Sachs has indicated that “holders of investment properties are likely to be net sellers (to owner-occupiers) for the foreseeable future.” This transition would have an outsized impact on the distribution of property wealth. It will affect market dynamics as more properties convert from investment to homeownership.