October 4, 2021 | NBER Paper Considers Peak China Housing

This Time is Different co-author, and Harvard Professor Ken Rogoff has co-authored an illuminating paper for the National Bureau of Economic Research (NBER) that estimates the downside risk that China’s over-built, over-leveraged property sector poses its economy.  They conclude that even a historically modest 20% deflation in China’s once-in-a-century property bubble would result in a 5-10% decline in the nation’s economic growth.  See it here, Peak China Housing.  Here’s the takeaway:

Hence to estimate the sum effect of real estate on the economy, we consider not only the output of real estate sector alone, but also the output share of closely related industries. Using the input-output table, 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.

…In this case, the aggregate economic impact of real estate comes to 24% of GDP, whereas a similar definition gives the U.S. at about 15%.

The paper does not look at contagion risks for other countries like Canada and Australia, where property markets have ballooned with China’s over the past decade, nor does it look at the knock-on effects that a 5 to 10% hit to Chinese growth would mean for the third of global growth that has been reliant on China in recent years.  But it would be significant; here’s the why:

…As we have already discussed, real estate has an amplifying effect due to its linkage to other sectors of the economy, for example, construction, household appliances, furnishings, leasing services, etc. Therefore, a reduction in housing activities may contribute to a downward spiral in the economy, leading to further declines in employment, income, consumption, and investment.

Danielle Park October 4th, 2021

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