Real Estate

Under China’s planned economy the state held firm control over land use rights across the country. Then, reforms in the 1980s changed everything; while the government retained ultimate ownership over land in China, it began to allow citizens to purchase land use rights for leases up to 70 years. State-owned firms gradually stopped providing housing for employees, real estate developers sprang up to fill growing market needs, and a mortgage lending industry was born to meet the demand of new homebuyers.

Going into the 21st century, revenues for China’s real estate market grew by leaps and bounds along with the country’s broader economy as developers responded to growing demand. Cultural norms such as the expectation that men own a home before marriage helped fuel the rapid construction of new housing, as did the megatrend of urbanization (the urban population grew from around 36 percent in 2000 to just under 64 percent in 2020). Consumers’ newfound disposable incomes supported the development of shopping districts, malls, and other recreational projects in China’s cities.

Serious problems have plagued the real estate market, however. Incentive structures that determine local officials’ promotion prospects hinge on meeting GDP growth targets, leading to an abundance of white elephant projects across China as party cadres approved major developments that contribute to GDP but provide little to no real value down the line (China’s infamous ghost cities are perhaps the most vivid example). Corruption has added fuel to the fire as local cadres give developers government-approved contracts in exchange for hefty kickbacks. Moreover, as China’s central government has restricted local governments’ access to fiscal funds, localities have responded by engaging in widespread “land finance,” making money by selling land use rights to developers through opaque, off-the-books entities known as local government financing vehicles (LGFVs). As property prices continued to rise year after year, investors began to act like they would never plateau, leading to overinvestment, speculation and overvalued assets, made worse by Chinese investors’ reluctance to put money in China’s volatile stock markets.

While property markets have been a bulwark of China’s renowned GDP growth in recent decades, the dynamics laid out above have resulted in a real estate market shot through with wheeling-and-dealing and debt-fueled growth. In an attempt to reign in the real estate sector, Beijing in 2020 limited developers’ access to funds, creating a cash crunch for many of the country’s top property firms (most famously Evergrande). Given the fact that by some measures, real estate drives a third of economic activity and accounts for 70 percent of household wealth, it remains to be seen if Beijing will be able to keep the property crisis from spilling over into the broader economy.