Real Estate: Returning to Real Demand and Reducing Excessive Financialization

Housing is a basic necessity, and it is essential to properly balance its dual properties as both a consumer product and an asset for investment. However, historically, China’s real estate market has taken the path of excessive financialization in the process of accelerating economic development and urban modernization. The deviation from its attribute as an essential consumer product has negatively affected people’s livelihood, economic growth, and financial stability, and has even limited the effectiveness of counter-cyclical macroeconomic policies, which has hindered, to some extent, the progress towards common prosperity. The financialization of land and the commoditization of housing have caused the excessive financialization of China’s real estate market. They are the core issues on the supply and demand sides of this market, respectively. On the supply side, local governments have been raising financial resources through land asset liquidation and mortgage financing, which has deepened the financial cycle spanning from land prices to housing prices, and to credit supply. The balance sheet of local governments is “tied” to the land market, pushing up land prices and leading to the continuous expansion of hidden debts and real estate bubbles. On the demand side, since the institutional reform of the housing market in 1998, China has created an imbalanced supply structure characterized by a boom in developer-built housing and a shortage of low-income housing as well as long-term rental housing, with the majority of households relying on mortgages and other financial instruments to meet their housing needs. Moreover, the financialization of land and the commoditization of housing are mutually reinforcing, strengthening the dependence of local governments on land, incentivizing developers to raise debt and leverage, and guiding the allocation of bank loans to the housing market. The problem has been exacerbated by the connections between banks and some real estate companies. We believe the real estate sector should reduce excessive financialization, and that housing revert to its primary attribute as an essential consumer product. Therefore, the supply-side reform should be vigorously pursued, whereas speculative demand must be resolutely suppressed. The legislation on real estate tax should be accelerated to revamp local government funding sources. We believe China should expand the supply of high-quality low-income housing, build a multi-tiered and laddered supply system, and vigorously develop the rental housing market with legal protection.