## CHINA’S REAL ESTATE CHALLENGE

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**Canonical URL:** [CHINA’S REAL ESTATE CHALLENGE](https://www.imf.org/-/media/files/publications/fandd/article/2024/12/rogoff.pdf)

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### Executive summary
- China’s long-running real-estate boom is slowing, with implications for growth, consumption, and local government finances.
- Real estate, including both residential and commercial activity and accounting for direct and indirect demand, represented 25 percent of China’s economy in 2021 (about 22 percent excluding imported content); the share rises to 31 percent if infrastructure is included.
- Cities with large cumulative real estate stocks are experiencing diminishing returns to new real estate investment and greater local government debt pressures.

### Key facts and statistics
- House prices rose tenfold since the early 1990s in China’s major markets.
- Household-debt-to-GDP ratio tripled from less than 20 percent in 2008 to more than 60 percent by 2023.
- Table 1 (real estate and infrastructure as a percent of GDP, including direct and indirect demand, in 2021):
  - Real estate construction: Direct value added 4.9 percent; Total final demand 16.5 percent.
  - Real estate services: Direct value added 6.8 percent; Total final demand 5.0 percent.
  - Imported component: Direct value added n/a; Total final demand 2.9 percent.
  - Total real estate activity: Direct value added 11.6 percent; Total final demand 24.4 percent.
  - Infrastructure construction: Direct value added 2.1 percent; Total final demand 7.3 percent.
  - Real estate and infrastructure contribution to economy: Direct value added 13.7 percent; Total final demand 31.7 percent.
- In major cities, home-price-to-income ratios had reached levels nearly double those of London and Singapore, and three times those of Tokyo and New York (as reported five years ago).
- Tier 3 cities account for 60 percent of China’s GDP; many tier 3 cities have seen the sharpest price declines.
- Historical simulation result from prior work: a 20 percent fall in the size of China’s real estate sector would lead to a 5–10 percent fall in output, cumulatively over a number of years, even absent a financial crisis.
- City-level growth regressions indicate diminishing returns on real estate can account for perhaps 2 percent of the slowdown in China’s growth rate (reported as a lower bound, not counting financial fragility or further effects on consumption).

### Evidence of diminishing returns and spatial heterogeneity
- Aggregate input-output analysis and city-by-city growth regressions indicate that cities with a large cumulative real estate stock obtain significantly less benefit from new real estate investment.
- Price patterns by city tier (Jan. 2021 = 1):
  - Tier 1: relative stability (Beijing, Shenzhen, Guangzhou, Shanghai).
  - Tier 2: intermediate behavior (provincial capitals and administrative cities).
  - Tier 3: substantial declines, concentrated in many smaller and generally poorer cities.
- Rising ratio of housing under construction to housing completed over time signals more troubled projects (projects in default, buyers pulling out, or properties under dispute).

### Economic risks and transmission mechanisms
- Scale and durability: Real estate and related sectors account for about 15 percent of employment, making absorption of displaced resources difficult.
- Local government balance sheets: Cities with heavy past construction have faced higher local government debt and fiscal strain when growth fails to offset investment costs.
- Consumption and confidence: Loss of confidence in real estate has significantly impacted consumption.
- External reorientation limits: Repurposing construction capacity for green-transition exports faces geopolitical and political frictions abroad.

### Findings from recent research (Rogoff and Yang)
- City-level instrumental-variable analysis shows diminishing returns across space and time; higher cumulative construction reduces marginal returns to additional investment.
- Price and project completion indicators reveal concentrated distress in many tier 3 cities, though not uniformly across all smaller cities.
- The estimated 2 percent contribution to growth slowdown from diminishing returns should be treated as a lower bound because it excludes financial-system fragility and further consumption effects.

### Policy implications (as presented)
- The article does not prescribe specific policy actions but highlights:
  - The transition away from real-estate-led growth is difficult even without a Western-style financial crisis.
  - The financial problems of local governments and the hit to consumption from falling housing prices are formidable challenges that must be confronted.
  - China’s situation is not as exceptional as previously argued; historical patterns from other countries suggest large real estate slowdowns can have profound, economy-wide effects.

*Kenneth Rogoff and Yuanchen Yang, F&D DECEMBER 2024 (article: “China’s Real Estate Challenge”).*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/12/rogoff.pdf_