Four international trends for housing prices stabilizing and rebounding

Four international trends for housing prices stabilizing and rebounding

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The market is currently focused on one question: Where is the bottom of the real estate market?

In their latest report, CITIC Securities macro team members Zhou Junzhi and Xie Yuxin reviewed several property cycles in Japan, South Korea, and the United States since World War II, and summarized four international rules for judging the transition of real estate from weak to strong:

First, transaction volume stabilizes ahead of prices rebounding; second, housing prices in core cities rebound first; third, monetary easing (10-year government bond yield does not exceed core inflation by more than 200 basis points) is a necessary condition; fourth, improvement in economic growth expectations is the fundamental prerequisite.

Referring to international experience, CITIC Securities states that China's real estate market is currently in a deep adjustment period, and patience is required to wait for all four signals to appear simultaneously: stabilization of sales volume, decreasing inventory in first-tier cities, sufficiently loose monetary conditions, and improvements in economic growth expectations. Only when these conditions are met can we confirm that a real turning point is coming for the real estate market.

Additionally, the report notes that almost every ten years, the world experiences a broad property cycle. As global economic and monetary cycles are highly correlated, global property cycles are likewise strongly connected. Data from most countries show that monetary policy cycles last about 4-7 years, so it also takes 4-7 years for real estate cycles to bottom out and recover.

Two Global Resonances of Property Cycles

  • 1970s: Global Real Estate Turmoil Triggered by Stagflation

The report indicates that in the 1970s, the property cycles of Japan, South Korea, and the United States resonated strongly, essentially due to global stagflation caused by the oil crisis. The oil crisis led to sharp swings in inflation, prompting synchronized tightening of global monetary policy. In 1973, the Bank of Japan raised the discount rate sharply from 4.25% to 9.0%, and housing prices fell by about 29%. South Korea raised its benchmark interest rate from 12% to 18% in 1979, which, combined with GDP growth dropping sharply from 9.7% in 1978 to -1.7% in 1980, led to a deep property market adjustment. The U.S. also experienced two waves of property market fluctuations during the same period.

The stabilization of the property market during this period had common characteristics. In 1977, Japan’s property market stopped declining and rebounded, benefiting from monetary easing after stagflation receded, along with the rise of emerging industries such as automobiles and electronics, which drove economic recovery. The key was that the population aged 25-44 remained at a high level, there was strong rigid demand for housing, and the resident leverage ratio was only 38.8%, far lower than the levels in the U.S. and Germany.

  • 1990s: Synchronized Cycles Amid Globalization

The property cycle of the 1990s was more complex. Japan experienced the peak of its long property cycle in 1990, only showing signs of stabilization in 2002—a period of adjustment lasting 12 years. South Korea also entered a property downturn at the end of 1991 that lasted until the end of 2001. However, the underlying logic of the property cycles of the two countries was quite different: Japan faced a major turning point due to the resonance of three factors—population structure, growth drivers, and financial tightening; South Korea, on the other hand, was just receiving industrial transfers from Japan and was at an economic growth peak.

In the U.S., the 1990s saw the “Goldilocks era.” Although the savings and loan crisis caused some disturbances, favorable factors such as population, growth, and technology led to a golden period for the property market. This was also the era of a surge of globalization after the collapse of the Soviet bloc, during which the global economy was highly synchronized. Although the endogenous growth drivers of different economies varied, global economic and monetary mini-cycles remained highly coordinated.

Four International Rules for Property Price Stabilization and Rebound

If the property market is in a downward trend, how can stabilization be achieved? CITIC Securities provides four regular clues.

Rule One: Sequence of Volume and Price—Transactions First, Prices Follow

Reviewing historical data shows that property stabilization follows a clear sequence: first, transaction volume increases; then inventory drops; and finally, prices stabilize. This rule is especially evident in the U.S. and Japan.

The report cites examples: U.S. existing home sales hit a low of just 3.3 million units in July 2010, then rebounded and stabilized at around 4 million units. However, prices did not bottom out until March 2012, after which they stabilized and rebounded. In Japan’s capital region, the sales volume of newly built apartments stabilized at 90,000 units per year since 2000, and sales in Tokyo's 23 wards stabilized at over 30,000 units, yet prices did not hit a new low and rebound until 2003.

The underlying logic is: When real estate is in a downward phase, its commodity attribute needs to warm up first, before the financial attribute can be discussed. After sales volume stabilizes, the timing of short-term price stabilization depends on the actual housing supply-demand structure—namely the housing vacancy rate and inventory level. This is closely related to the scale of rigid-demand population expansion and the speed of population concentration in core city clusters.

Rule Two: Housing Prices in Core Cities Rebound First

Experience from Japan and South Korea shows that prices in core urban areas tend to give early signals of stabilization. After 2001, Korean housing prices stabilized and rebounded; from 2001 to 2007, Seoul’s housing prices rose by 91%, much higher than the nationwide increase of 56%. When Japan’s property market stabilized in 2004, prices in Tokyo’s 23 wards rebounded first, increasing by 8.1%, surpassing the overall capital region’s 7.1% rise.

The fundamental reason why core cities rebound first is population "re-agglomeration." The high income in core urban areas attracts continuous population inflow; even as Japan’s total population declined, core urban clusters maintained positive growth, and not until 2019 did the population growth rate of cities with over one million people turn negative. Between 2015 and 2022, rents in Japan’s capital region rose by 27.1%, while in the Kinki region they rose by only 16.9%. The rent premium in core cities further demonstrates this trend.

Rule Three: The Necessary Degree of Monetary Easing

Property market stabilization requires monetary easing—this is a necessary but not sufficient condition. Historically, as the property market recovers from deep downturn, a typical phenomenon is that the 10-year government bond yield does not exceed core inflation by more than 200 basis points.

Japan launched unconventional monetary policy in 1998 to address low inflation; the 10-year bond yield remained around 1%, with real interest rates after deducting inflation at about 2%, preventing excessively high real rates from further suppressing demand. In 2003, Japan’s core CPI decline narrowed notably, reaching -0.4% in April and turning positive at 0.1% in October—the first positive reading since 2000. After the 2007 subprime crisis in the U.S., the Federal Reserve quickly launched unconventional monetary policy, and the yield spread between the 10-year bond and core inflation also followed the less-than-2% rule.

In response to the savings and loan crisis, the U.S. cut interest rates more than 20 times between 1989-1992, by a total of 680 basis points, lowering the federal funds rate sharply from 9.8% to 3%, and fixed mortgage rates from 11% to 8%, creating the conditions for the housing market’s rebound in 1992.

Rule Four: Improvement in Growth Expectations is the Fundamental Prerequisite

Another necessary prerequisite for property market stabilization is improved growth expectations. From a micro perspective, property is valued based on leveraged income expectations, so each cycle of property stabilization and repair coincides with continued or improved economic growth momentum.

Before the property market stabilized in Japan in 2004, bad assets in the property chain had been cleared out in 2002, and export rebound brought new growth momentum in 2003. In April 2003, Japan's core CPI was -0.4% year-on-year, with a clearly narrowed decline, turning positive at 0.1% in October, the first positive reading since 2000. The consumer confidence index rebounded significantly from 35 in 2003 to about 48. As economic growth improved, residents’ income returned to positive growth, and housing prices subsequently stabilized and rebounded.

Korean property stabilization after 2001 was also driven by three factors: clearing of bad financial assets and interest rate cuts spurred economic recovery; after China joined the WTO in 2001, Korea’s share of exports to China jumped from 12.1% to 21.8% (2001-2005), and total trade volume increased by 211%. Population continued to concentrate in the capital region, and housing supply shortages became apparent again.

The underlying logic of the U.S. real estate rebound in the 1990s was even more clear: the rise of the internet wave, combined with a sustained increase in the population aged 25-44 creating new rigid demand; even if there was short-term decline, a little monetary easing could quickly stabilize and rebound prices.

Through combing multiple property market cycles in Japan, South Korea, and the U.S., the report summarizes three underlying rules that affect property market trends:

First, the commodity attribute of property comes from population, the pricing of its financial attribute depends on growth expectations (which determine future income) and monetary liquidity (which determines discount rate);

Second, the rises and falls of real estate mini-cycles are often linked to monetary tightness or ease, whether the stabilization is firm depends on growth momentum, and the long-term trend is determined by population;

Third, when monetary easing, strong growth, and vibrant population resonate together, the property market enters a strong cycle; otherwise, it experiences a prolonged weak cycle.

The report suggests that to judge whether the property market has stabilized, it is necessary to track four leading indicators: whether transaction volume rebounds first, whether core city inventory falls to low levels, whether the yield spread between 10-year bonds and core inflation narrows to within 200 basis points, and whether growth expectation indicators such as consumer confidence index improve. The experience of most countries shows that monetary policy cycles last 4-7 years, and property cycles take the same time to bottom out and recover. In special cases (like Japan), it takes even longer to break out of negative drag.

China's real estate market is currently in a deep adjustment period. Based on international experience, patience is needed to wait for four signals to appear simultaneously: stabilization of sales volume, dropping inventory in first-tier cities, sufficiently loose monetary conditions, and improved economic growth expectations. Only when these conditions are met can it be confirmed that a genuine turning point has arrived, presenting a medium- to long-term allocation opportunity.

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