China’s population may be shrinking, but household formation still has room to run. Urbanisation is a weakening tailwind however, and given a substantial inventory build-up, policy makers cannot hold back a decline in underlying demand forever.

  • China’s population may have started to decline in 2022, but this does not signal an impending collapse in underlying housing demand. China’s urbanisation has further to run, and the number of households should continue to expand until 2040. 

  • However, underlying demand generated by both urbanisation and household formation will weaken from here. 4m additional households per year is around half the rate that was experienced between 2000 and 2010. Moreover, our modelling points to a sizeable inventory overhang having been generated over the past 10 years. 

  • It is possible that structural factors – such as urbanisation and limited alternative savings vehicles – keep vacancies high (~12.6%), limiting a painful adjustment from excess inventories. And policy makers have scope to delay the rebalancing within real estate – for example by launching another ‘shanty town’ redevelopment drive. But they cannot hold back the tide forever: weaker household formation should pull down on construction too, likely creating a substantial drag on long-run growth absent major reforms to China’s growth model. 

  • These dynamics may be too far in the future to influence equities and credit markets now (the latter is rightly preoccupied with near-term solvency), but this reinforces our belief that slowing potential growth will largely balance out upward pressure from demographics (and associated lower savings rates) on real equilibrium interest rates (r*) and government bond yields. 

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