Fitch cuts China 2026 home sales forecast to 11-13% decline

Fitch Ratings cut its 2026 forecast for China's new home sales to an 11-13% decline from a prior estimate of 7-8%, as persistent weakness in lower-tier cities continues to offset nascent recovery in a handful of core urban markets.

"Most rated developers will still need time to digest legacy land reserves, with margins remaining squeezed in 2026 and only gradually improving over the next few years," Fitch Ratings said in its revised forecast. The ratings firm noted that most home-buying demand has shifted to secondary home transactions.

Among state-owned developers rated by Fitch that disclose monthly data, all except Yuexiu Property (00123.HK) recorded sales growth in the first five months of 2026. The divergence highlights how even well-capitalized builders are navigating a market where lower-tier cities continue to drag on aggregate sales, offsetting gains in core cities such as Beijing and Shanghai. The last time China's new home sales contracted at a double-digit pace was in 2022, when sales fell roughly 27% following the Evergrande crisis, according to National Bureau of Statistics data.

The deepening contraction prolongs the distress in China's property sector, which has been in a multi-year downturn since Evergrande's default in late 2021 triggered a wave of developer failures. With margins expected to remain under pressure through 2026, developers face an extended period of balance sheet repair, while local governments reliant on land-sale revenue will feel the fiscal strain. The sector's struggles also weigh on broader economic growth, with real estate and related industries historically accounting for roughly a quarter of China's GDP.

The shift toward secondary home transactions represents a structural change in Chinese homebuyer behavior. Buyers, wary of delayed completions and quality concerns surrounding new developments from financially stressed builders, are increasingly turning to the resale market. This trend supports overall transaction volumes but does little to help developers clear inventory of unsold new homes, keeping new home stockpiles elevated.

Chinese authorities have rolled out a series of measures to stabilize the property market since late 2022, including cutting mortgage rates, relaxing home purchase restrictions in major cities, and launching a program to purchase unsold homes for affordable housing. The People's Bank of China has also lowered the five-year loan prime rate — the benchmark for mortgage pricing — by more than 100 basis points from its 2022 peak. Despite these efforts, the recovery has been uneven, concentrated in tier-1 cities while lower-tier markets continue to struggle.

For investors in Chinese developer debt, the downgrade points to a prolonged recovery timeline. Dollar bonds issued by Chinese property developers have rallied since late 2024 on hopes of a sector turnaround, but Fitch's revised forecast suggests fundamental improvements may take longer to materialize. Private developers with heavy exposure to lower-tier cities face the most acute pressure, while state-owned enterprises with stronger balance sheets and access to cheaper funding are better positioned to weather the downturn.

The divergence between core cities and lower-tier markets is likely to persist. While cities such as Beijing, Shanghai, and Shenzhen have seen tentative signs of stabilization supported by policy easing, smaller cities face structural headwinds from population outflows and an oversupply of housing stock. Fitch's revised forecast suggests this bifurcation will continue to define China's property market through at least 2026, with the path to recovery dependent on how quickly developers can work through their land reserves and how effectively policy stimulus translates into new home demand.

This article is for informational purposes only and does not constitute investment advice.