China: Prolonged stagnation path – Commerzbank

Commerzbank’s Dr. Henry Hao argues China’s housing downturn, now in its fifth year, is settling into an L-shaped stagnation with a pronounced K-shaped regional divergence. The report highlights persistent weakness in developer funding, construction starts and demand, despite localized stabilization in Tier-1 cities. Structural headwinds from demographics and policy constraints suggest China’s real estate sector will remain a drag on growth for years.

L-shaped stagnation with K-shaped split

"The question we aim to answer in this insight is whether the downturn is finally approaching an inflection point. Recent data from the first half of the year indicates a localized stabilization in top-tier cities. While some analysts point to this as a sign of a housing recovery, we take a different view and see China’s real estate sector as locked into a prolonged period of stagnation."

"Inventory pressure is the clearest sign of regional divergence. Top-tier cities are gradually working through excess supply, with average absorption periods in Tier-1 and Tier-2 cities falling to 21 months and 27 months, respectively, as of May 2026. By contrast, lower-tier cities remain burdened by tens of millions of unsold units, with an average absorption period of about 84 months, or roughly seven years."

"In 2026 H1, total funds available to real estate developers contracted by 18% yoy (Chart 5). The primary source of funds for developers traditionally came from pre-sales and mortgages. With buyers retreating, this revenue stream has dried up."

"This brings us to housing starts. New construction starts have dropped to a mere 24% of their July 2021 level. This is the most forward-looking indicator of developer sentiment."

"In conclusion, we maintain our view that China's real estate sector is locked into an L-shaped trajectory. The market is settling into a permanent, downsized baseline. This L-shaped recovery is accompanied by a severe K-shaped divergence."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)