The Chinese Real Estate Market and Its Whys and Whats

By Ethan Wu, University of Virginia

The Chinese real estate market has long been a cornerstone of the country’s economic development. Since China’s adoption of market-driven reforms in the 1990s—particularly the pivotal housing reform of 1998, which privatized state-owned housing and created a property market—it has experienced unprecedented growth. This expansion has been driven by rapid urbanization, government policies, and cultural norms, leading to booming construction and skyrocketing property prices. However, such growth has also bred volatility, culminating in the burst of a long-standing housing bubble in the 2020s.

This article explores the motivations behind Chinese investment in real estate, the causes of the bubble’s collapse, its impacts on the economy, and the ongoing government and business efforts to stabilize the sector.

Why Did the Chinese Want to Invest in Real Estate?

The Chinese population’s deep-rooted reliance on real estate stems from economic, structural, and notably, cultural factors. Historically, property in China was passed down through generations rather than sold, making ownership a marker of family legacy and wealth. The phrase “owning land means coming from a long line of money” reflects this deep-seated association between real estate and stability. Surveys, like those referenced in the China Household Finance Survey (CHFS), highlight that 19% of urban households owned more than one property by 2013, underscoring the speculative fervor and cultural emphasis on housing.

Economically, the lack of alternative investments solidified real estate as the primary vehicle for wealth preservation. Limited financial instruments, strict capital controls, and underdeveloped capital markets left few options for Chinese households to diversify their wealth. Rapid urbanization compounded this demand, with 500 million people migrating from rural areas to cities spanning from the Millenium to 2017. This movement not only fueled housing demand but also created speculative opportunities as investors sought to capitalize on continuous price increases. By 2014, property prices in Tier 1 cities like Beijing and Shanghai were over 25 times the average household income, an unsustainable figure that nonetheless attracted speculative buyers.

Why Did the Price Bubble Pop?

The Chinese real estate bubble began deflating in the 2020s, driven by a mix of oversupply, speculative practices, and deliberate government interventions. Developers, fueled by soaring demand and easy credit, overbuilt to such an extent that vast "ghost cities" emerged across the country. By 2013, the vacancy rate had already climbed to 22.4%, reflecting an imbalance between supply and demand. This glut of unsold properties highlighted the unsustainable nature of the market’s expansion.

Government policy played a crucial role in triggering the collapse. In 2020, the "three red lines" policy was introduced to reduce financial risks, particularly in the over-leveraged real estate sector. This policy set strict limits on the leverage ratios of property developers, restricting their access to credit. Evergrande, one of China's largest real estate firms, became the poster child for the resulting financial strain as it defaulted on billions in debt. This default sent shockwaves through the industry, undermining confidence and accelerating the downturn.

Economic conditions exacerbated the bubble’s collapse. China’s GDP growth had been slowing for years, but the COVID-19 pandemic dealt a significant blow to household incomes and purchasing power. Residential property transactions fell sharply, from 15 million units in 2019 to just 9 million in 2023, according to data from the National Bureau of Statistics. This contraction in sales further eroded market stability, creating a vicious cycle of declining prices and demand.

What Impacts Did the Real Estate Market Have on the Chinese Economy?

The collapse of the real estate market has had profound consequences for the Chinese economy, affecting various sectors and stakeholders. Once a pillar of economic growth, the real estate sector’s contribution to GDP, previously exceeding 10%, has plummeted. This decline has dragged down overall economic performance, reducing growth rates across the board.

Local governments have been particularly hard-hit. For years, they relied on land sales to fund infrastructure projects and public services. The downturn in land demand and prices has created significant fiscal deficits, constraining their ability to meet these obligations. Many municipalities now face tough choices, including cutting public spending or taking on additional debt, further straining local economies.

At the household level, the real estate collapse has eroded wealth and dampened consumption. With property values falling, homeowners who saw their homes as a store of wealth have curtailed spending, further slowing economic activity. Financial institutions have also felt the effects, as banks and lenders with significant exposure to real estate now face rising non-performing loans. This has raised concerns about the stability of the broader financial system and its ability to weather future shocks.

What Are Some Current Efforts by the Governments and Businesses?

In response to the crisis, the Chinese government and private sector have implemented a range of measures aimed at stabilizing the real estate market and mitigating its broader economic impacts. The government has lowered mortgage rates and relaxed home purchase restrictions in many cities to encourage demand. These monetary and fiscal policies aim to make housing more accessible to first-time buyers and stimulate market activity.

Debt restructuring has been a key strategy for addressing the challenges faced by major developers. Companies like Evergrande, a property developer, have been allowed to renegotiate their obligations, while state-backed funds have been allocated to complete unfinished housing projects. This approach seeks to rebuild buyer confidence and prevent further defaults, which could destabilize the sector even more.

Local governments have also introduced targeted subsidies and incentives to boost demand, particularly in smaller cities where housing oversupply is most pronounced. Policies promoting rural-to-urban migration aim to absorb excess inventory, while infrastructure investments support broader economic activity. On a larger scale, the Chinese government is pursuing economic diversification, reducing reliance on real estate by fostering growth in sectors like technology, green energy, and advanced manufacturing.

While these efforts have provided some relief, achieving long-term stability will require structural reforms. Expanding financial markets to offer alternative investment opportunities and ensuring greater transparency in the real estate sector are critical steps toward a more balanced and sustainable economy.

Conclusion

The Chinese real estate market’s boom and bust offer valuable lessons. The reliance on speculative growth, coupled with unchecked debt accumulation, underscores the risks of failing to balance development with regulation. Future policies must prioritize economic diversification, encourage alternative investment avenues, and create a robust regulatory framework to prevent similar crises.

While the government’s efforts to stabilize the market have provided temporary relief, achieving long-term stability will require deeper reforms. This includes expanding financial markets to offer households and investors viable alternatives, ensuring land and property markets are more transparent, and fostering sustainable urbanization. Only by addressing these structural challenges can China, and really, any economy, ensure its economy remains resilient in the face of future uncertainties.

Cover photo taken from Free Malaysia Today.