Under‐developed financial markets and the housing sector in China

Abstract We document key stylized facts about China's housing sector and develop a tractable DSGE model featuring two household types and capturing demand and supply channels. The model highlights that under‐developed financial markets lead to persistently low interest rates, which fuel housing speculation by investors, boost construction by developers, drive up prices, and crowd out non‐housing sectors. Our analysis implies that policy makers should go beyond short‐term, housing‐specific measures; rather, deepening financial markets would redirect resources from housing speculation toward productive sectors. Our model also underscores the importance of a comprehensive package combining financial market reforms, macroprudential policies, and social security reforms.