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China's Real-Estate Balancing Act

China’s government has emphasized that policies to address financial vulnerabilities and structural problems should not impede economic growth. But, when it comes to the real-estate sector, that will not be an easy balance to strike – and getting it wrong could have economy-wide repercussions.

BEIJING – Despite strong global economic headwinds, not least from the COVID-19 pandemic, China managed to achieve 8.1% GDP growth last year, its highest rate in a decade. With that, China met the International Monetary Fund’s expectations and far surpassed its own government’s 6% target.

But China’s economic performance is not quite as strong as it may seem, and not only because year-on-year growth figures were flattered by the pandemic-induced trough in 2020, when the growth rate slowed sharply, to just 2.3%. China’s growth momentum was much weaker in the second half of the year (4% growth, year on year) than in the first half (12.7%), owing largely to the government’s efforts to rein in the real-estate sector.

China has good reason to be vigilant. Housing prices have roughly tripled over the past 20 years, with the ratio of home prices to annual income now averaging 43.15 in Shenzhen, 42.47 in Beijing, and 33.36 in Shanghai, compared to 13.37 in London and 8.76 in New York City. This partly reflects the misallocation of resources: China has built too many skyscrapers, luxury hotels, and high-end apartments, and not nearly enough affordable housing. Speculation is also a concern.