Boom to balance

For decades, China's meteoric economic rise has stood out as one of the most remarkable stories in modern history. Alongside this growth, the country's housing market has evolved into a cornerstone of household wealth, transforming how millions of Chinese families save, invest and consume. Yet, as with any great success story, this progress casts a long shadow. Indeed, the once-booming real estate market has brought with it a slew of challenges, including soaring housing prices, sluggish consumption, and structural imbalances between the real and financial sectors. However, it is critical to recognize that both excessively high and excessively low housing prices can be equally harmful to the economy. In particular, starting around 2022, as housing prices declined nationwide, household wealth shrank, and mortgage-related financial stress intensified. Against this backdrop, "stabilizing the real estate market "has become a top priority on the policy agenda, as recently stated in the Central Economic Work Conference held in December. So, how did housing become such a pivotal part of China's economy, and what steps can be taken to address its challenges and ensure the market to develop sustainably in the future?

In retrospect, China's housing market has undergone a remarkable transformation over the past few decades. Before the late 1990s, urban housing was primarily a State-controlled asset, with residential units distributed to workers as an integral part of their employment compensation. However, the sweeping real estate reforms of the late 1990s fundamentally restructured this system, introducing market mechanisms that allowed urban residents to freely purchase and sell properties. This pivotal shift redefined the role of housing in Chinese society, transforming it into a primary store of wealth for households across the nation.

This transformation has led to remarkable outcomes. A recent study by the National Institution for Finance and Development highlights the extraordinary scale of China's housing market: by 2022, residential property assets represented 47 percent of household asset holdings and 221 percent of the nation's GDP. For Chinese families, home-ownership transcends mere shelter — it serves as a cornerstone of financial security and a buffer against economic uncertainty. While housing constitutes a substantial portion of household wealth in developed economies such as the United States, France, Germany and Japan — typically ranging from 15 percent to 30 percent — the magnitude and rapidity of China's housing market expansion are unprecedented. This remarkable growth has been driven by a powerful combination of supportive government policies and deeply rooted cultural values that prioritize property ownership.

While the surge in housing wealth has undoubtedly improved living standards and boosted household prosperity, it has also given rise to significant economic challenges. Perhaps the most pressing issue is that the soaring housing prices in major cities such as Beijing and other first- and second-tier metropolises have not only significantly increased the living costs for local residents, but also heavily strained local businesses' ability to remain competitive as well.

Conversely, the recent broad-based decline in housing prices has revealed equally severe risks. In fact, slumping housing prices have exposed significant vulnerabilities in the household sector's balance sheets by eroding property values and increasing the default risk associated with mortgages. Moreover, the resulting negative wealth effect has weakened consumer confidence, prompting a rise in so-called precautionary savings, which has further suppressed economic activity. Meanwhile, concerns are also mounting on the supply side. Developers are struggling with rising debt burdens and a growing inventory of unsold properties, while local governments — heavily reliant on land sales — are facing escalating fiscal pressures. The financial sector is similarly under strain, with a large number of non-performing loans tied to the real estate market.

Given the importance and complexities of China's housing market, what steps can policymakers take to address these issues? Striking the right balance will be essential to foster a healthy and sustainable housing market and its associated industries.

First, the government should provide targeted financial support to homebuyers, particularly first-time buyers. This support could include low-interest loans, subsidies, and tax incentives to boost demand and stabilize housing prices. Furthermore, enhancing affordability through increased availability of affordable and social housing will meet the needs of middle- and low-income households. These measures will improve housing accessibility, stabilize prices and foster a more sustainable housing market.

Second, comprehensive risk management frameworks for the real estate sector are essential to identify and mitigate systemic risks. These frameworks should include regular monitoring of financial health indicators for developers and financial institutions, ensuring compliance with prudent lending practices and the timely delivery of presold homes. By proactively addressing vulnerabilities in mortgage-based financial activities, policymakers can avert crises, safeguard market stability and foster confidence among both investors and consumers.

Third, the government, in collaboration with developers and banks, should expedite the renovation of urban villages and dilapidated housing to improve living conditions and expand the supply of quality housing. This initiative can tap into latent demand for both essential housing and housing upgrades while revitalizing communities. Furthermore, by investing in infrastructure and public services in these areas, the government can enhance the appeal of these neighborhoods, encouraging current residents to remain while attracting new families.

Fourth, one of the key reasons for housing being so highly valued in major cities in China is its strong connection to public service resources such as education, healthcare and social security. In many cases, owning a home in a desirable location offers better access to these essential services. Simply put, if public services such as schools and hospitals were of comparable quality everywhere, fewer people would feel pressured to live in big cities, leading to more balanced growth across the country.

Finally, from a long-term perspective, policymakers should prioritize diversifying the economy to reduce over-reliance on the real estate sector. This should involve channeling greater investment into high-tech industries, green energy, and advanced manufacturing to foster new growth drivers and mitigate the systemic risks associated with the property market. Such efforts will not only create a more balanced economic structure but also enhance China's global competitiveness in emerging industries.

In conclusion, a multipronged approach, including targeted financial support, systemic risk management, urban renewal, equalized public services, and economic diversification, remains essential for stabilizing the real estate sector, reducing structural imbalances, and unlocking new growth opportunities for the future.

The author is a researcher at the Institute of Economics at the Chinese Academy of Social Sciences and a senior researcher at the National Institution for Finance and Development. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.