China's real estate market outlook has reversed! UBS warns: Home prices will fall for at least two more years, winter is not over.

For a long time, John Lam, the head of UBS's China real estate research, who has held a contrary view, has retracted his previous bullish forecast and officially joined Wall Street's pessimistic camp, predicting that the Chinese property market's prolonged four-year slump is far from over. This significant report points out that China's housing prices will continue to decline for at least another two years before stabilizing and recovering. The main reason is that potential buyers, as housing prices continue to fall, are increasingly choosing to rent rather than buy, considering that homebuyers over the past decade may generally face losses.

UBS stance takes a 180-degree turn: from bullish to warning

Lin Zhenhong's shift in stance has drawn considerable attention, as he gained fame for sharply downgrading Evergrande Group's rating in early 2021—11 months before Evergrande officially defaulted. Last year, he boldly turned bullish on the industry. Earlier this year, Lin Zhenhong predicted that, driven by first-tier cities in China, housing prices could stabilize as early as the beginning of 2026. However, UBS Group adopted a more pessimistic stance on China's real estate market just a few months later.

Lin Zhenhong clearly pointed out in his latest report that he expects the decline in Chinese housing prices to last for at least another two years. He mentioned that a key factor is that during the continuous decline in housing prices, potential homebuyers are increasingly inclined to rent. He stated that those who bought homes in the past decade may be in a state of loss, which “fundamentally changes the expectations of housing prices.” This reversal of psychological expectations is a deeper structural change than supply and demand data.

Lin Zhenhong's previous recovery forecast was based on the expectation that the oversupply of residential properties would ease after many cash-strapped developers stopped purchasing land. Last year, the new construction area of houses by developers fell by 63% compared to the downturn that began in 2021, a decline that exceeded the 48% drop in sales area, and this trend continues this year. Although the fundamental factors on the supply side (i.e., the decrease in new construction) have not changed, Lin Zhenhong stated that the continued decline in housing prices has shaken buyers' long-term belief that “real estate is a safe investment,” leading more potential homebuyers to choose to wait and see.

The Scissors Difference Between Rent and Mortgage Rates Reveals the Dilemma of China's Real Estate Market

Lin Zhenhong further explained the driving factors behind rental preferences: the rental yield in first-tier cities is far lower than the mortgage loan interest rate. His research report shows that in October, the average rental yield in China's first-tier cities was 1.81%, while the national average mortgage loan interest rate was 3.07%. In a situation where the rental return rate is significantly lower than the cost of purchasing a home, more people choose to wait and see.

This inverted phenomenon reveals the underlying logic of falling housing prices in China from an economic perspective. Under normal circumstances, the rental yield should be close to or slightly higher than the risk-free rate to compensate for the risks and management costs borne by landlords. When the rental yield (1.81%) is far lower than the mortgage rate (3.07%), it indicates that the monthly mortgage payment for homebuyers is significantly higher than the rent for comparable properties, making renting a more rational choice.

He believes that rental prices are an “early indicator” of the supply and demand dynamics in the housing market, “because this data is not subject to government intervention.” He predicts that after housing rents stabilize, the decline in Chinese housing prices will stop. This judgment has significant forward-looking implications, as rents reflect the true utility value of housing, rather than speculative premiums. Only when rents stop falling and stabilize, indicating a recovery in actual housing demand, can housing prices have a foundation for bottoming out.

2026-2027 China Housing Price Forecast Path

Lin Zhenhong predicts that unless Beijing introduces significant stimulus measures, the prices of second-hand homes in China's first-tier cities will continue to fall by 10% in 2026 and by another 5% in 2027. Currently, the prices of second-hand homes in major metropolitan areas have dropped more than one-third from their peak levels.

Prediction of China's housing price fall in the next two years

2026: Prices of second-hand homes in first-tier cities will fall by another 10%, with a cumulative decline exceeding 40%.

2027: The price of second-hand housing in first-tier cities falls another 5%, entering the bottom-building stage.

Prerequisites: Assuming no major stimulus policies are introduced, the market will naturally adjust.

This gradual decline forecast shows that China's housing market has entered a “slow clearance” stage, rather than a “rapid collapse” mode. Data from October 2025 further verifies this trend: the prices of newly built commercial residential properties fell by 0.5% month-on-month, marking the largest drop in a year. It is noteworthy that all 70 large and medium-sized cities monitored by the National Bureau of Statistics recorded price declines, which is extremely rare in recent years. The prices of second-hand homes in first-tier cities fell by 4.4% year-on-year, second-tier cities by 5.2%, and third-tier cities saw a drop of 5.7%.

Fitch Ratings expects the situation to worsen further, believing that the sales area of new homes may still decline by 15% to 20% before the market stabilizes. The agency maintains a negative credit outlook for the Chinese real estate market until 2025, citing structural challenges such as demographic changes, persistently high housing affordability pressures, and a large backlog of unsold inventory.

Bloomberg reported last week that policymakers are weighing new measures to reverse the real estate sector, including nationwide subsidies for mortgage interest rates for the first time. In addition, a candid former Chinese finance minister recently warned that the bleak outlook for households caused by falling housing prices will exacerbate inflationary pressures in China.

The Rise of the Rental Market Changes Housing Culture

As the willingness to buy houses continues to decline, China is experiencing a profound transformation in housing culture. In traditional views, housing has long been regarded as a necessary condition for marriage and wealth accumulation, but this model is being broken. According to data, the homeownership rate among Chinese adults aged 25 to 34 has fallen from over 70% in 2010 to 50% in 2020.

At the same time, the rental market continues to heat up. The average rental yield in first-tier cities has risen to 2.2%–2.5%, higher than the 1.8%–2.0% in 2023. Amid increasing market uncertainty, more and more young professionals are choosing to postpone home purchases, thereby driving up rental demand. This trend reflects the younger generation's adaptation to the “housing for living, not for speculation” policy, as well as a rational assessment of the risks of continued decline in housing prices.

Shanghai remains one of the few bright spots, with new home prices rising 5.7% year-on-year in October 2025; however, even so, the price of second-hand homes in this financial center has still recorded a decline, reflecting the overall weak pattern of falling housing prices in China. The differentiation between new and second-hand home prices shows that the scarcity of certain core urban areas is still recognized, but overall market confidence has yet to recover.