Real estate has been a cornerstone of China’s economy, propelling its rapid expansion in recent decades and contributing up to 20 percent of economic activity. However, this reliance has led to the accumulation of significant risks.
In the decade preceding the pandemic, home prices soared relative to household incomes, fueled by consumers channeling their savings into real estate due to limited alternative investment options. Expectations of continuous price appreciation allowed developers to borrow heavily, with land sales serving as crucial revenue sources for local governments.
In response to these risks, authorities have taken decisive measures to curb excessive borrowing and mitigate other vulnerabilities in the property sector. Following the onset of the pandemic, real estate activity contracted sharply, prompting efforts to promote rental housing, expand affordable housing, and revitalize underdeveloped urban areas.
Despite progress in downsizing the sector, challenges persist, posing ongoing risks to sustainability. Many developers remain financially strained, supported by lenient loan recognition rules, which have prevented widespread bankruptcies but have also delayed necessary adjustments. Additionally, home prices have seen only modest declines due to regulatory interventions aimed at stabilizing prices.
Structural factors, including demographic changes, further pressure the housing market. Declining population growth and slowing urbanization reduce the need for new housing, while fiscal constraints limit public subsidies for housing development.
Looking ahead, real estate investment is expected to decline further and remain subdued, with various scenarios projecting reductions of 30 percent to 60 percent below 2022 levels, reflecting similar downturns witnessed in other countries.
Increased spending on affordable housing and urban redevelopment could partially offset investment declines. However, efforts to address the substantial housing inventory held by troubled developers remain insufficient.
A smoother transition for the real estate sector is attainable through market-based price adjustments and timely restructuring of insolvent developers. Phasing out rules that delay loan recognition and supporting viable developers while tightening risk prevention measures are crucial steps. Insuring homebuyers against developer insolvency and implementing stricter escrow rules for presale financing would enhance consumer protection.
Moreover, introducing a nationwide property tax and improving saving options could reduce households’ reliance on real estate investment. Fiscal reforms to align local governments’ revenues and spending obligations are imperative to reduce their dependence on property-related activities.
**Authors:**
Henry Hoyle – Economist, IMF’s Asia and Pacific Department
Sonali Jain-Chandra – IMF Mission Chief for China