A Tale of Two Countries: The Real Estate Crises in 1990s Japan and Contemporary China | Kenneth Rogoff (Harvard University) Yuanchen Yang (International Monetary Fund)*

Abstract:

Real estate has long been central to China’s growth model, yet since 2018 its contribution has declined sharply, turning the sector from a key engine of expansion into a major drag on economic activity. While policy tightening triggered the downturn, it reflects deeper structural imbalances in a sector that, together with its upstream and downstream linkages and infrastructure, accounts for nearly one-third of aggregate demand.

With housing comprising nearly 70 percent of household wealth, the ongoing price correction has generated sizable negative wealth effects, amplifying the contraction through depressed consumption, investment, and sentiment. We document the macroeconomic propagation of China’s real estate downturn and assess the risks of prolonged stagnation should the sector continue to deteriorate.

To provide perspective, we compare China’s experience with Japan’s real estate collapse in the 1990s, uncovering striking parallels in investment dynamics and consumption responses despite profound institutional differences. Our findings highlight the importance of real-side channels, including alternative amplification mechanisms (in addition to banking), in generating persistent output losses following real estate busts.