【Student Question】 Hello, Master. In the current mainstream views and analyses of the property market, many reasons are cited for why the state needs to intervene to maintain housing prices:
- Real estate is the mother of all industries. When the property market rises, the economy does well.
- Rescuing real estate is not about rescuing developers — it is about rescuing debt, rescuing the currency, rescuing domestic demand, and ultimately protecting employment.
- It is also said that 75% of Chinese residents’ assets are tied up in real estate, while Americans allocate only 28% of their wealth to housing. So if property prices crash sharply, many people will end up deeply in the red.
In your view, when it comes to risks in China’s current property market — which single point deserves the most attention?
【Master Chi’s Response】 China’s housing prices and property market cannot crash or collapse — because doing so would trigger systemic risk across China’s entire banking sector. And the most extreme form that risk can take is a full-blown financial crisis.
Since the last century, there have been over 130 financial crises worldwide. More than 100 of them had direct links to real estate.
While real estate plays an important role in the national economy, it is simultaneously a major source of systemic risk.
On one hand, real estate’s contribution to value creation and employment carries significant weight in the national economy. In terms of GDP generation and jobs, real estate development spans numerous industries and absorbs a large labor force. As the primary collateral asset, it has also made outstanding contributions to local government infrastructure financing. Its role in overall economic growth cannot be ignored.
But at the same time, certain things demand attention:
Guard against real estate risk igniting systemic risk. The virtual economy framework holds that the core of real estate risk is mortgage debt risk.
Real estate is China’s leverage counterweight. Its nominal value props up the other end of the balance — which is massive debt — and that debt in turn uses financial leverage to hold up the entire economy. Once property prices crash sharply, it is like the counterweight suddenly losing mass and plummeting. The result is either a fracture in the financial leverage chain, or a complete breakdown of the debt chain — triggering defaults, debt runs, liquidity shortages, bank tightening, and ultimately a full financial crisis.
Therefore, a sharp near-term drop in property prices — before you even factor in the broader economic environment or social stability — would first and foremost deliver a severe blow to the country’s financial system and institutions, with the potential to trigger a systemic crisis.