China’s Ghost Cities Are a Problem for Europe’s Luxury Brands, Too

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China’s Ghost Cities Are a Problem for Europe’s Luxury Brands, Too

Luxury spending in China has traditionally been correlated with home prices. – Raul Ariano/Bloomberg News

How closely is demand for $3,000 handbags tied to home prices in China? Quite closely, it turns out, which is unfortunate for luxury brands.

Europe’s luxury stocks fell in early trading Tuesday after China’s economic planning agency ******* to announce additional measures to kickstart growth that some investors had hoped for. The sector is still up 10% on average since Beijing

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late last month.

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Beijing hopes a cut to mortgage rates, and lower down-payment requirements for buyers of second homes, will jump-start the country’s

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. A package of loans to brokers and insurers to buy ******** shares has had initial success at lifting the stock market.

Luxury spending in China has traditionally been more correlated with its home prices than with the financial markets or overall economic growth. Around 60% of net household wealth was tied up in property before prices peaked in 2021. Barclays estimates that falling home prices have destroyed about $18 trillion in household wealth since then, which is equivalent to roughly $60,000 per family.

This, along with worries about the wider economy, is hurting consumer confidence. Retail sales rose just 2.1% in August compared with the same month last year, according to data from China’s National Bureau of Statistics. When global luxury brands start to report their third-quarter results next week, ******** demand is expected to have slowed since they last updated investors.

Flagging sales come at an unhelpful time for Europe’s luxury companies, which rely on ******** consumers for a third of global luxury spending. After several bumpy years during the pandemic, luxury brands and their investors hoped that a comeback in ******** spending would compensate for a slowdown among Europeans and Americans.

This looks increasingly unlikely. Luxury sales to ******** shoppers are expected to shrink 7% in 2024 and by 3% next year, according to UBS estimates. As luxury brands have high fixed costs, including the most expensive retail rents in the world, a slowdown with such key customers could have an outsize impact on profit margins.

The last time the luxury industry went through such a rocky patch in China, barring the pandemic, was between 2014 and 2016 when Beijing was cracking down on ***********, including officials who were gifting Louis Vuitton handbags and Rolex watches in exchange for political favors. The global luxury industry barely grew for two years during China’s anticorruption drive, which also coincided with a property-market correction in the country. It didn’t help that shoppers in other markets were also tiring of logos back then.

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Europe’s luxury stocks look expensive today compared with that time. As a multiple of expected earnings, listed brands’ shares now trade at a roughly 40% premium to their 2014 to 2016 average.

To justify the higher price tag, Beijing’s housing and wider economic stimulus would need to indirectly lift luxury demand. Measures rolled out so far may not be enough to slow the slide in home prices. China’s housing market is oversupplied by around 60 million units, according to Bloomberg Economics estimates.

New incentives to kick-start consumption are expected soon but will probably target mass-market products like white goods. China already rolled out trade-in subsidies for home appliances earlier this year and a range of consumption coupons.

None of this is very helpful for sellers of expensive luxury goods. For brands to see a recovery, ******** consumers that spend anywhere from $7,000 to $43,000 a year on luxury products would need to feel much better about their finances than they currently do. Spending by this group has fallen 17% so far this year compared with the same ******* of 2023, according to a report by Boston Consulting Group.

Half-finished, abandoned housing estates are a big headache for China’s government, and are also on the mind of executives in Paris and Milan. Though the fortunes of luxury bosses likely isn’t high on ******** officials’ priority list, their fates may be intertwined.

Write to Carol Ryan at *****@*****.tld

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#Chinas #Ghost #Cities #Problem #Europes #Luxury #Brands

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