Stabilizing China’s Housing Market

IMF Working Papers, April 13, 2018

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The sharp rise of house prices in China’s Tier-1 cities has fostered a great deal of commentary about the possibility of bubbles forming there.
China’s unique housing market characteristics make it difficult to assess the macroeconomic severity of bursting bubbles, even if they exist. These characteristics include the setting of land supply and prices by the government, among many others.
The presence of overbuilt “ghost cities” greatly complicates the ability of traditional macroeconomic policies to address these concerns.
The paper examines proposals to shore up the mortgage underwriting and legal infrastructure to help China withstand the impact of falling prices, should this occur.

Rapid house price increases in Tier-1 cities are a focal point for bubble concerns.
Market assessment is complicated by institutional features:
- Government setting of land supply and prices.
- Existence of overbuilt “ghost cities.”
Traditional macroeconomic policy responses may be limited in effectiveness given these structural and institutional characteristics.
The paper assesses mortgage-sector vulnerabilities and legal/institutional gaps that would influence the macroeconomic impact of price declines.

Strengthen mortgage underwriting standards to reduce borrower and lender vulnerability to price declines.
Improve the legal infrastructure surrounding mortgage enforcement to increase predictability and recoverability in distressed markets.
Consider mechanisms to bolster mortgage guarantee systems and the mortgage guarantee sector to contain systemic risk.
Explore approaches to mitigate borrower default and delinquency rate escalation in the event of falling housing prices.

Stabilizing China’s Housing Market, WP/18/89, April 2018
- Stabilizing China’s Housing Market, WP/18/89, April 2018 (Markdown version)
- Stabilizing China’s Housing Market, WP/18/89, April 2018 (PDF)