China’s declining population is damaging the real estate market

China’s real estate sector has been working to deepen the recession for years. At present, population shrinking is casting another shadow over a stagnant real estate market.

Goldman Sachs estimates that demand for new homes in urban Chinese cities will remain curbed by less than 5 million units per year over the next few years.

“The decline in population and slower urbanization suggest a decline in demographic demand for housing over the next few years,” an economist at Goldman Sachs said in a memo on Monday.

According to Tianchen Xu, senior economist at Economist Intelligence Unit, the latest World Bank data shows that the country’s population will drop from 203.5 billion to less than 13.9 billion, according to the latest World Bank data.

A population shrinkage will disrupt demand in 500,000 units each year in the 2020s, leading to 1.4 million dents per year in the 2030s, compared to the positive contribution of 1.5 million units in the 2010s when the population was stable.

After Beijing eased its only child policy in 2016, and despite Beijing’s efforts to encourage childbirth through cash incentives, the country’s fertility rate continues to decline. Stagnant income, instability in employment outlook, and poor system of social security have discouraged young people in China from giving birth to more babies.

According to Xu, Beijing’s birth policy is likely to have “limited effects” as it has not addressed deep-rooted issues, and the trend of people postponing marriages due to high economic costs for childcare and the “embracing of individuality.”

The emphasis on declining birth rates has resulted in nearly 36,000 kindergartens nationwide being closed in the past two years, bringing the number of kindergarten students down over 10 million. This was announced by the Ministry of Education, according to calculations of official CNBC data. Similarly, between 2022 and 2024, the number of elementary schools fell nearly 13,000.

It is rippling through the housing market adjacent to schools that once inflated prices against strong demand for better public schools.

The once-cool premium was driven by expectations for access to elite schools and increased assets value. However, the value added of these homes is beginning to decline as population and local governments expand their district-based registration policies, according to William Wu, a Chinese real estate analyst at Daiwa Capital Markets.

The mother of a 7-year-old boy from Beijing told CNBC that prices at her apartment had fallen about 20% since she bought it more than two years ago. It cost about twice the average price of an apartment in the city so my son could attend a good elementary school.

According to Wind information, the number of children entering primary school in 2023 reached the highest level for over 20 years.

That demographic change is an additional overhang to the property market, and despite a lot of central and local government measures since September last year, it has been struggling to emerge from the painful recession since the second half of 2020.

Macquarie’s China Economic Director Larry Hu said new home prices fell the fastest in seven months in May, extending the two-year stagnation despite efforts by the government to arrest the decline.

New home sales in 30 major cities fell 11% per year in the first half of this month, worsening from a 3% decline in May, Hu said.

“The owners of investment property are likely to be net sellers (to the owners) in the near future,” Goldman Sachs estimates over expectations that home prices will continue to fall.

Goldman expects China’s rise in urbanization rates will be curbed over the coming years and will damage demand for urban housing, but WU said the demographic drag in the real estate market is still “not imminent” and could take decades.

In the near future, “part of this decline will be offset by continued urbanization and demand for housing upgrades,” Wu said.

– CNBC’s Evelyn Cheng contributed to this story.