Leverage Shocks, Market Frictions, and Downturn of China’s Urban Housing Market
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Abstract: This study is among the first to investigate the role of deleveraging in the transition of China’s urban housing market from a prolonged boom to a structural downturn between 2017 and 2024. Specifically, we investigate how supply-side exogenous deleveraging shocks contribute to the market downturn. Addressing significant data constraints regarding firm-level financial statements in China, we develop a Bartik type instrumental variable by matching the leverage, national sales and local sales of 111 listed real estate firms in 29 cities. The sample represents 38% of national GDP and 39% of the urban population, capturing the most credit-sensitive urban housing markets in China. Contrary to the co-movement of household leverage and housing price, our baseline result finds positive effects of deleveraging shocks for firms on housing price. Mechanism analysis reveals that this was driven by supply-side government and firm responses that neutralized downward pressure even as demandside fundamentals deteriorated. Specifically, increased land price by local governments, expanded pre-sale area by firms and local governments, and supply-reduction-driven passive destocking by firms decoupled price from market fundamentals during the real estate downturn in Chinese cities as of 2024. Comparative analysis indicates that price declines mainly occurred in markets with high valuations rather than weak economic fundamentals.