The escalating crackdown in tech draws attention, but the bigger risk is that the new regulatory enthusiasm tips over a more familiar target

       China’s regulatory crackdown has wiped billions off technology companies’ market value. But the continuing squeeze on real estate—if allowed to run much further—could have even bigger repercussions.

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       Property is arguably the most crucial industry in China. Including related businesses like construction materials and housing appliances, the sector accounted for 16.4% of China’s economy last year, according to Nomura. Despite Beijing’s constant refrain that “housing is for living in, not for speculation," property prices, especially in the biggest cities, have continued to rise. One reason: The housing market has long been an important lever to boost the economy during downturns, leading to a seemingly endless cycle of tightening and easing.

       This latest round of tightening started last year with Beijing’s new “three red lines" policy capping property developers’ leverage. Evaporating funding has crushed weaker players—most notably China Evergrande, the most indebted developer in the country.

       Mortgages have also become more expensive and take longer to be approved. And this year, some cities have rolled out price controls in the secondary market. The number of secondary transactions in Shenzhen in August fell 82% from a year earlier. Freezing up the secondary market could in turn further hamper already weak new home sales and price gains: Developers sold 21% fewer homes in August, compared with a year earlier, according to data on 30 Chinese cities tracked by information provider Wind.

       A crackdown on runaway housing prices jibes with other recent initiatives like President Xi Jinping’s populist call for “common prosperity." Unaffordable homes are a major cause of inequality and an obstacle to child-rearing. A huge amount of capital has also been channeled into housing that could be put to more productive uses. Previous research has linked China’s housing boom to falling productivity.

       The problem, of course, is that property is already so entwined with China’s economy that a sudden stop could be extraordinarily dangerous.

       It is a major source of public revenue: land sales accounted for 30.8% of local government revenue in 2020, according to Nomura. A property tax would be a more sustainable way to derive income from the sector, but a nationwide rollout still looks remote.

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       Real estate is the biggest asset of Chinese households—who recognize that the political sensitivity of the market, and its outsize economic footprint, make sustained price falls risky for Beijing. A lack of investment options and the preference of banks for mortgage loans has exacerbated that concentration. The wealth impact from a housing crash could seriously affect already-weak consumption.

       The slowdown in construction is already becoming a major drag on the economy through lower demand for construction materials and retail goods like appliances. That could soon spill over to the banking system. At the Bank of China, the impaired loan ratio for real estate stood at 4.91% in June, compared with 0.41% a year earlier. So far, it looks manageable but it would become a much bigger problem if falling prices or a weaker job market start to hurt mortgage repayment. Real estate, construction and mortgages accounted for 41% of the BOC’s loans in mainland China, for example. The housing boom has fueled an enormous rise in household borrowing: it stood at 62% of gross domestic product as of June, compared with 44% five years earlier.

       Longtime China watchers may expect the government to dial back property curbs when they start to bite in the usual on-again, off-again fashion. The risk is that in the current fevered political and regulatory environment, the “on" button might stay pressed a bit too long—with very serious consequences for financial stability and growth.

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