China’s real estate sector may have peaked and will likely become a drag on growth during economic shocks such as the current pandemic, a recent report co-authored by Kenneth Rogoff argues The decades-long housing boom has causes both prices and supply to be misaligned and the market may have hit “a potentially precarious peak,” according to the working paper by Harvard University’s Rogoff and Yuan Yuanchen of Tsinghua University in Beijing. Housing is still unlikely to be the trigger for an imminent financial crisis due to regulatory protections like high down payments, they wrote.
“We find that a 20% fall in real-estate activity could lead to a 5%-10% fall in GDP, even without amplification from a banking crisis, or accounting for the importance of real estate as collateral,” it said.
Despite the Chinese authorities’ capacity to intervene and regulate the market, the current situations “will make finding a soft-landing challenging” and “even modestly declining prices, compared to the usual pattern of ever rising prices, could pose a considerable risk.”