China's Painful Slump Could Be Ending and Global Investors Are Taking Note
The next steps for China's and Hong King's property markets will be key for prospects in 2026, for equity markets and homeowners.
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Are the long and painful slumps in China's and Hong Kong's property markets over?
The answer could prove pivotal for both economic and equity prospects in 2026, particularly if we see a recovery in home values. Hong Kongers are smarting from a five-year decline that’s led to a 28.8% correction in prices.
A Years-Long Struggle
China’s economy has been struggling ever since the Beijing government introduced its “three red lines” on creditworthiness in August 2020. The new regulations forced a rapid deleveraging among property developers, destroyed homebuyer confidence and caused a vicious cycle of declining home prices and property sales.
Hong Kong has slightly separate drivers from mainland China. But what was both the most-expensive and least-affordable property on earth has experienced a long correction in property values, one that started in 2021. The Centa-City Index compiled by property brokerage Centaline Properties has corrected by close to one-third.
Just as China entered a period of subpar growth, U.S. interest rates started to rise. With the Hong Kong dollar pegged to its U.S. counterpart, the city saw stalling economic growth at the same time that rates were on the rise. This painful combination happened against a backdrop of property-cooling measures from the government that deterred all but the hardiest of property purchasers.
Exceptional Year for Stocks
This has been an exceptional year for both the Hong Kong and China stock markets. Hong Kong is leading the world for capital raised in initial public offerings, with global-minded China plays keener to list in Hong Kong’s offshore market than risk political blowback with a U.S. listing.
The Hang Seng index in Hong Kong is up 30.1% year to date, serious outperformance over the 17.1% advance for the S&P 500. For mainland China, the CSI 300 of the largest listings in Shanghai and Shenzhen is up 19.2%, indicating both that Hong Kong has the higher-quality listings and that global investors have been doing much of this year’s buying.
They are making up for lost time. Hong Kong was frequently the world’s worst-performing major market in the post-COVID years, as higher U.S. rates kicked in. For 2023, the index lost 13.8% of its value, compounding the 15.5% decline in 2022.
The stock-market woes produced what’s politely called a “negative wealth effect,” people feeling poorer as their stock portfolio and their property value declined in tandem. It is hard to work your way out of such negative economic trends, let alone shake off the negative psychological state it produces.
Buyer Behavior Shows Lack of Confidence
We are still in that phase where reality is marching ahead of buyer behavior. This year’s stock-market gains are now abetted by falling U.S. interest rates, meaning we have the opposite situation: Hong Kong interest rates are declining to match the U.S. rate cuts, while stocks are up and economic growth has increased for fourth straight quarters.
Jones Lang LaSalle (JLL) certainly believes Hong Kong has turned a corner.
“Housing prices have bottomed out, and the outlook for 2026 is cautiously optimistic,” Joseph Tsang, JLL’s Hong Kong chairman, said in a report looking ahead to next year.
The brokerage expects mass-residential home prices to gain around 5.0% next year, having ticked 1.4% higher in 2025. Luxury values, which have at times detached for the overall economic situation in Hong Kong, still lost 4.0% this year but appear set to at least hold flat for 2026.
Lower interest rates make more difference for mass-market properties, while luxury values hinge on global trends and where China’s uber wealthy want to park their money. Mass-market sentiment should improve, JLL believes.
“Recent prime-rate cuts and the anticipated further reductions will further ease financing costs, while pent-up demand continues to unwind, providing sustained momentum for transactions,” Tsang stated.
Longer to Wait in China
China may have longer to wait for any recovery.
Growth in home price values peaked in 2016 during a credit bubble as well as in 2019, but have been losing value virtually every month since April 2022. Their steepest decline was in October 2024, when they lost 5.9% that month alone.
The situation has stabilized since then. Home prices still lost 2.2% for October, the latest figures available, but the rate of decline has corrected.
Still, whereas in Hong Kong the government has lifted its special stamp duty and other transaction taxes designed to cool property prices, China is leery about stimulating the property market. When prices move, backed by a Chinese Communist Party “guarantee,” they can move fast, and the government has learned from the 2016 experience to avoid provoking such a situation.
Heading into next year, the Beijing government is concentrating its efforts in two areas: to achieve technological independence, and boost dominance in other markets comparable to the advantage China has in rare earths and critical minerals and to find a long-term strategy to boost Chinese consumption.
“However in 2026, the single-most-important factor that could affect Chinese economic growth will probably not be in these two areas,” asserted Vincent Chan, China strategist at Hong Kong-based Aletheia Capital. “Instead, for near-term growth, we should focus on the trend of investment.”
Investment Key to China’s Prospects
Chan noted that investment has either slowed down sharply in 2H 2025, or was already mired in negative territory for an extended timeframe. He is looking at property-sector investment as well as investment in infrastructure and capital expenditures.
Chan noted that the downturn started in 2022, “and there is no sign it will end yet.” This property pessimism “will continue to be a strong headwind to the economy, consumption in particular.”
It was necessary to force the excess leverage out of the property sector, which was driven by developers selling off-plan properties, taking on massive levels of debt, and recycling cash from quick sales as rapidly as possible. But it is proving an extremely painful process.
Property sales were down 5.4% in early October, even flagging in China’s biggest cities, which normally hold up better. Land sales are also suffering since developers have depleted any cash reserves, robbing local governments of a vital source of funding.
That headwind looks set to remain as we move into 2026. It will take a change in wind speed and direction to see China’s economy get much of a lift in the next year.
