China's Real Estate Bubble and the End of Its Growth Model

 

Bubble History: Humanity’s Speculative Fever

China’s real estate bubble is more than just an overvaluation of assets—it is a structural crisis that exposes the limits of the growth model of the world’s second-largest economy. As the long-held belief that “home prices will always rise” crumbles, China’s real-estate–centric development strategy now faces a fundamental challenge.

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The Rise of China’s Real Estate Market

The rapid expansion of China’s real estate market is closely linked to the government-led urbanization policies. With the abolition of the real allocation system for housing in 1998, the era of commercial housing began, and real estate quickly became a key engine of China’s economic growth. Today, the real estate sector and its related industries have ballooned to such an extent that they account for roughly 30% of the nation’s GDP.

In this process, a uniquely Chinese development model emerged. Local governments became heavily reliant on revenues from land sales, while developers expanded their projects through pre-sale schemes financed by consumer funds. Banks, in turn, increased lending by using real estate as collateral, and residents embraced the idea of wealth accumulation through rising property values. The slogan “buy a house with borrowed money” became the Chinese version of the American Dream.

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Structural Flaws in the Model

However, this model has been fraught with serious issues:

• Disconnection from Purchasing Power: In first-tier cities like Beijing and Shanghai, home prices have reached 40 to 50 times the average annual income, far outstripping real purchasing power.
• Unsustainable Debt Levels: Developers have accumulated debt at levels that have become increasingly unsustainable.
• Excess Supply and ‘Ghost Cities’: Overbuilding has led to the emergence of “ghost cities” across the nation—urban areas with little to no occupancy.

In 2020, the Chinese government introduced the “three red lines” policy to limit the leverage of real estate companies. This move precipitated the default of Evergrande Group, whose crisis—burdened with $300 billion in debt—quickly spread throughout the market. Other major developers, such as Country Garden and Sinic, soon followed with their own cascading difficulties.

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Economic Impact and Government Dilemma

The downturn in the real estate market has had a profound effect on the broader Chinese economy. Local government finances have deteriorated, the construction sector has contracted, and households are witnessing a decline in asset values that has dampened consumer sentiment. More fundamentally, the crisis signals that the investment-driven growth model itself has reached its limits.

The Chinese government now finds itself in a difficult dilemma. On one hand, bold rescue policies risk fostering moral hazard; on the other, inaction could spiral into a full-blown economic crisis. Although a variety of stimulus measures have been announced since 2023, restoring market confidence remains a formidable challenge.

Compounding these issues is the entanglement with shadow banking. Many developers have secured funding not through conventional loans but via trust products or wealth management schemes. The true scale and risk associated with this informal financing are difficult to gauge, adding another layer of uncertainty.

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Demographic Challenges and Global Implications

Demographic shifts further complicate the recovery of China’s real estate market. With the country now facing a declining population and rapid aging, along with rising numbers of single-person households and lower marriage rates among the younger generation, a structural decrease in housing demand is anticipated.

This crisis is not confined to China alone—it also carries significant repercussions for the global economy. China accounts for half of the world’s steel consumption and 40% of its copper consumption. As a result, a downturn in its real estate market directly impacts commodity markets and emerging economies. Moreover, a slowdown in China’s growth could exert deflationary pressures on the global economy.

When compared to Japan’s real estate bubble, several key differences emerge. While China is still in the midst of urbanization and has a broader array of policy tools at its disposal, it faces even graver challenges in terms of debt levels and demographic shifts.

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The Inevitable Structural Transition

Ultimately, this crisis underscores that a structural transition in China’s economy is inevitable. The nation must shift from an investment- and export-driven model to one centered on domestic consumption and services, moving from quantitative to qualitative growth. However, it remains uncertain how successfully this transition can be implemented.

China’s real estate bubble and the challenges it represents serve as a stark reminder: the growth model that fueled decades of expansion is showing its limits. The coming years will be critical as China navigates this transformation—one that will not only reshape its own economy but also have far-reaching implications for the global economic landscape.