The Impact of Real Estate Prices on China's Financial System Risk

Abstract

This thesis examines the impact mechanism of real estate price fluctuations on China's financial system risk based on the current situation of China's real estate capital market. Against the backdrop of the policy that "housing is for living in, not for speculation," as China's macroeconomic growth gradually decelerates, the supply and demand dynamics in the real estate market have shifted from supply shortages to overall balance or even oversupply in certain regions, making the issue of real estate price bubbles increasingly prominent.
At the theoretical level, this thesis analyzes the relationship between real estate price fluctuations and systemic risk, identifying the transmission channels through which real estate price fluctuations trigger systemic risk. It finds that in the primary real estate capital market, system risk is mainly transmitted through the collateral channel, liquidity channel, and capitalization channel, while in the secondary real estate capital market, transmission occurs primarily through asset securitization. Moreover, under China’s institutional conditions, episodes of rising real estate prices are often accompanied by oversupply of new housing, excessive credit expansion into real estate related activities, and speculative purchases, which together magnify the build-up of vulnerabilities. Conversely, when real estate prices decline, these accumulated exposures may trigger loss propagation across the real estate market, the financial system, and multiple sectors of the macroeconomy.
In terms of empirical analysis, this study focuses on the impact of real estate price fluctuations on system risk through the real estate enterprise channel. Based on data from China's listed real estate enterprises, the study analyzes the effects of real estate price fluctuations on corporate solvency, financing capacity, and default probability. The research finds that real estate price fluctuations have a significant asymmetric impact on corporate financing capacity, with the negative impact of declining real estate prices on financing capacity being significantly stronger than the positive impact of rising prices.
The empirical results indicate that system risk exists in China's current real estate capital market, primarily transmitted through the real estate enterprise channel. A substantial decline in real estate prices would cause real estate enterprises to face liquidity risk, which would then be transmitted to the banking sector and adversely affect the stock market. Specifically: real estate price fluctuations generate liquidity risk for real estate enterprises, and while the impact on long-term solvency is relatively small, it significantly weakens enterprises' short-term solvency; real estate price fluctuations expose banks to liquidity risk through the real estate enterprise channel; an increase in real estate prices followed by a sharp decline creates negative shocks to the stock market.
This thesis provides theoretical foundations and policy recommendations for preventing system risk in China's financial market and promoting stable and healthy development of the real estate market. The research suggests constructing a system risk prevention system from multiple perspectives including real estate enterprises, banks, capital markets, and livelihood security, with particular focus on enterprise liquidity risk management, bank credit risk control, and market information transparency enhancement.