Has China's Housing Production Peaked?

• DOI: http://doi.org/10.1111/cwe.12360
• Date: 01 January 2021
• Author: Yuanchen Yang,Kenneth Rogoff
• Published date: 01 January 2021

©2021 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 1–31, Vol. 29, No. 1, 2021 1

*Kenneth Rogoff (corresponding author), Professor of Economics, Harvard University, US. Email: krogoff@

harvard.edu; Yuanchen Yang, Economist, International Monetary Fund, US. Email: yyang6@imf.org. The

authors thank Hanming Fang, Yueran Ma, Helen Qiao, and Wei Xiong for useful comments. We thank an

anonymous referee for reading the paper carefully and providing insightful comments.

Has China’s Housing Production Peaked?

Kenneth Rogoff, Yuanchen Yang*

Abstract

China’s real estate has been a key engine of its sustained economic expansion. This paper

argues, however, that even before the COVID-19 shock, a decades-long housing boom

had given rise to severe price misalignments and regional supply–demand mismatches,

making an adjustment both necessary and inevitable. We make use of newly available and

updated data sources to analyze supply–demand conditions in the fast-moving Chinese

economy. The imbalances are then compared to benchmarks from other economies. We

conclude that the real estate sector is quite vulnerable to a sustained aggregate growth

shock, such as COVID-19 might pose. In our baseline calibration, using input–output

tables and taking account of the very large footprint of housing construction and real

estate related sectors, the adjustment to a decline in housing activity can easily trim a

cumulative 5–10 percent from the level of output over a period of years.

Key words: housing cycles, international f‌i nancial crises, real estate

JEL codes: F39, G01, R3

I. Introduction

It has long been argued that, despite China’s truly epic real estate boom over the past three

decades (as documented in a number of previous papers, e.g. Chivakul et al., 2015; Fang et al.,

2015; Glaeser et al., 2017; Koss and Shi, 2018), the central government’s ability to tightly

monitor the f‌i nancial system, and to resolve insolvencies quickly in the event of a crisis,

makes it relatively immune to conventional housing-related f‌i nancial crises. At the same

time, however, this view has been largely untested thanks to the country’s extraordinary

growth performance, with expectations of further fast growth underpinning ever higher

housing prices. How vulnerable might the real-estate sector be in the wake of the

COVID-19 shock? We acknowledge that the concomitant collapse in global interest rates

has driven up the prices of long-lived assets, including housing. If the real interest rate

Kenneth Rogoff, Yuanchen Yang / 1–31, Vol. 29, No. 1, 2021

©2021 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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stays permanently lower, COVID-19 could postpone the tipping point for housing in the

Chinese economy, rather than bringing it forward. Even in this case, however, the supply/

demand imbalances we highlight here must come to the fore in the medium term.

This paper’s contribution is threefold. First, we make use of newly available

sources, to extend and signif‌i cantly update earlier work on the size and scale of China’s

housing market. We especially take advantage of the digitization of China’s statistics,

which has helped provide both more extensive and more accurate data. Fang et al. (2015)

document housing price growth in major Chinese cities from 2003 to 2013, while

Glaeser et al. (2017) track changes in China’s construction square footage, household

vacancy rates, etc. from 2002 to 2012. We f‌i nd that changes that were signif‌i cant even

before the COVID-19 pandemic have continued. During 2013–2018, for example, real

estate investment increased by 30 percent and household leverage ratio rose from 33

percent to 60 percent. Another important factor is that China underwent a major change

of leadership in 2013, and that has heavily inf‌l uenced the country’s real estate policies.

Thus, data (some of which run through 2020) give a signif‌i cantly more accurate picture

of China’s rapidly evolving housing market.

Second, we provide a quantitative characterization of the upstream and downstream

contribution to GDP of China’s real estate sector by exploiting newer input–output

tables. Our updated measure, based on cross-industry correlations derived from China’s

most recent input–output matrix, and taking into account higher order effects (in

addition to f‌i rst-order effects) is 29 percent, even higher than in earlier studies.1

Real estate activity involves both the production of property and the provision of

services related to property. The former refers to building, renovating, repairing and

maintaining property, while the latter includes buying, selling, renting, and managing

property.2 In addition, real estate is closely linked to an array of industries through the

supply chain. To complete a real estate project, various inputs are needed, including

intermediate inputs, such as steel and concrete, from the manufacturing sector, labor

input from the construction sector, capital input from the banking sector, etc. Hence to

estimate the sum effect of real estate on the economy, we consider not only the output of

real estate sector alone, but also the output share of closely related industries. Using the

input–output table, we f‌i nd that a 20 percent fall in real estate activity could lead to a 5–10

percent fall in GDP, even without amplif‌i cation from a banking crisis, or accounting for

1Previous studies using narrower measures of housing’s impact typically put the size of the sector around 16 percent

(e.g. Glaeser et al., 2017; Liu and Xiong, 2018). Our measure is closest in spirit to Cook et al. (2018) who use an

earlier (2012) input-output table and arrive at a 22 percent contribution of housing. See Appendix A.

2According to the International Standard Industrial Classif‌i cation (the ISIC codes), real estate is classif‌i ed as a tertiary

industry, encompassing only the provision of property-related services, which is merely part of housing activity.