China's real estate sector is undergoing a historic transition. During the 14th Five-Year Plan period (2021-25), the industry entered a phase of deep adjustment after more than two decades of rapid expansion. The development model that once powered growth — characterized by high leverage, rapid turnover and heavy borrowing — has over time become difficult to sustain.

The structural conditions underpinning the market have also changed. China's demographic profile is shifting, urbanization is slowing as it approaches maturity and the marginal contribution of property investment to economic growth has diminished.

Recognizing these shifts, policymakers have begun outlining a new direction for the sector. Since mid-2023, policy discussions have repeatedly emphasized a consistent approach: strictly control new supply, optimize the existing housing stock and improve the quality of housing. Most notably, central authorities have explicitly prioritized the goal to halt the decline and move toward stabilization in the property market, elevating its stabilization to a strategic level vital for the broader macroeconomy.

As China enters the 15th Five-Year Plan period (2026-30), the policy framework has become increasingly clear. The half-decade has a distinctly layered objective. First, it seeks to address risks that accumulated during earlier phases of rapid growth, including risks related to real estate, local government debt and smaller financial institutions. At the same time, it aims to establish a new institutional foundation for the housing sector — reforming systems governing property development, financing and sales, while expanding the supply of affordable housing.

Guided by this shift in thinking, China's real estate industry may undergo a fundamental transformation, gradually returning to its core purpose: providing housing rather than serving primarily as a vehicle for financial expansion.

The most urgent task in this transition is risk management and reduction. Since China launched its market-oriented housing reforms in 1998, real estate has played an essential role in improving living conditions and driving economic growth. Yet the current challenges facing the sector are not simply cyclical fluctuations. Rather, they reflect deeper balance-sheet pressures emerging across the economy.

Over the past two decades, China's property sector developed a distinctive high debt-high growth model. Developers expanded aggressively using leverage; households increased borrowing through mortgage lending; and local governments relied heavily on land-transfer revenues to support fiscal spending. Together, these dynamics pushed up property prices while accumulating financial vulnerabilities.

Today, the situation has reversed. As housing and land prices enter a downward cycle, the liabilities associated with those assets -bank loans, bonds issued by developers and other forms of debt — remain rigid. This mismatch between declining asset values and fixed debt obligations has weakened balance sheets across the sector. Faced with such pressure, economic actors tend to shift their priorities from maximizing profits to minimizing risks. Income that might otherwise be used for investment is instead directed toward debt repayment. At the same time, falling property values reduce household wealth, which in turn dampens consumption and weakens domestic demand.

Managing this process requires caution. During periods of market stress, developers may attempt to sell assets quickly or slash prices in order to generate liquidity and repay debts. While such decisions may be rational for individual firms, if many companies simultaneously act in the same way, the collective effect can be destabilizing. Prices may fall sharply, liquidity may dry up and the industry may enter a negative cycle, in which declining asset values intensify debt pressures.

The appropriate strategy is therefore not a sudden correction, but a gradual adjustment — what Chinese policymakers often describe as "exchanging time for space". Real estate's share of China's GDP increased from 4.5 percent in 1998 to about 6.2 percent in 2025. The sector will continue to play an important role in the economy, but its functions can be recalibrated. By guiding key indicators such as the price-to-income ratio, rental yields and vacancy rates back toward sustainable levels, the industry can gradually shed the excessive financial and speculative functions that accumulated during the boom years.

Building a new development model requires strengthening the institutional framework governing property development, financing and sales. One important reform is the strengthening of the project-company system, ensuring that each real estate project operates as an independent legal entity and that funds raised for a project are used exclusively for its construction and delivery. Another reform involves establishing a "lead bank" system for project financing, under which a designated bank- or banking consortium — oversees financing and manages project cash flows. This mechanism builds on China's housing-project "white-list" program introduced in 2024, which has already supported financing for millions of homes.

Another significant change concerns the way homes are sold. For many years, China relied heavily on the presale of unfinished apartments. Increasingly, however, policymakers are encouraging the expansion of completed-home sales so that buyers purchase homes that are ready to occupy. This approach reduces delivery risks and helps restore confidence in the market.

At the same time, many developers are exploring asset-light business models, in which they provide development management services rather than funding projects directly. As the industry undergoes adjustment, this shift toward professionalized services may become an important path for sustainable development.

Another critical task is strengthening the affordable housing system. Housing possesses both a market dimension and a social-welfare function. International experience demonstrates the value of a dual-track system. Singapore's public housing program, administered by the Housing and Development Board, houses more than 80 percent of the city state's residents, while Germany's cooperative housing sector helps stabilize rental markets.

China faces its own structural challenges. The country's urbanization rate has surpassed 66 percent, and housing difficulties for new urban residents and young people coexist with underused housing stock. Expanding the supply of affordable housing and improving related institutional arrangements will therefore be essential to creating a tiered housing system that combines social protection with market efficiency.

Housing remains, above all, a place to live. Ensuring adequate housing for vulnerable urban households through public housing programs is therefore a core social objective. For lower-income families, shared-ownership housing and other mechanisms can help lower the threshold for homeownership. For households seeking improved living conditions, market-based housing can meet demand under appropriate policy guidance.

Better housing quality also contributes to human capital. The concept of building "good homes" — safe, comfortable, green and technologically advanced — reflects a growing recognition that housing quality matters as much as housing quantity. Large-scale urban renewal and the renovation of aging residential communities will not only improve living conditions, but also generate new investment opportunities.

Finally, housing also affects consumption through its influence on household wealth. Because more than 90 percent of Chinese households own homes, declining property prices can reduce perceived wealth and dampen spending. Policymakers are therefore exploring ways to enhance the efficiency of housing-related financial tools such as China's housing provident fund system, whose accumulated balances remain substantial but underutilized.

For all these reasons, stabilizing the housing market remains essential. Sales and investment have continued to decline in recent years, and restoring stability will be crucial for both the sector itself and the broader economy. Major metropolitan areas — where economic activity is concentrated and population inflows remain strong — will play a key role in anchoring the market. At the same time, improving housing quality, expanding affordable housing, and strengthening fiscal and financial support will help rebuild confidence.

China's real estate sector is now standing at a critical juncture between old and new development models. The path forward is increasingly clear: address accumulated risks, stabilize the market, and establish a new framework centered on quality, sustainability and housing as a basic social good. Achieving this transformation will not only determine the future of the industry itself, but also shape the stability and long-term development of China's economy.

The writer is former director-general of the Financial Survey and Statistics Department at the People's Bank of China. The article is translated from a piece originally published in Financial Market Search.

The views do not necessarily reflect those of China Daily.