Given the prevailing economic situation, it is necessary to stabilize the real estate market in order to ensure continued economic growth, especially because the real estate market has fluctuated between slump and stability.

From January to November 2023, the total commercial housing sales area was 1,005 million square meters, down 8.0 percent year-on-year, with the overall sales revenue for commercial property being 10.53 trillion yuan ($1.36 trillion), down 5.2 percent year-on-year.

According to data from the National Bureau of Statistics, the price of second-hand residential property in first-tier, second-tier and third-tier cities fell by 44.04 percent, 7.52 percent and 9.54 percent, respectively, in November compared with their record peaks. The wide belief in the market, though, is that the real contraction is significantly higher than the figures cited above.

The contraction figures have been computed by the authors based on the NBS's accumulated data on month-to-month changes.

The real estate market's decline can be attributed to a variety of causes, along with the years-long fast-paced development of the real estate sector, which addressed the housing shortage problem, and the saturation of demand due to such factors as the aging population, low fertility rate and slowing urbanization.

In particular, three factors have led to the decline of the real estate market: lower income expectation leading to reduced affordability, declining housing prices resulting in decrease in supply, and weak confidence in housing as security investment leading to a drop in demand.

These factors have made selling property a challenging task, resulting in increased liquidity crises and the risk of defaults by real estate companies. This, in turn, has further lowered people's expectations in property prices, leading to a decline in housing demand. Hence, it is essential to take robust measures to raise people's expectations and stabilize the market.

To be sure, the authorities including the local governments have taken a range of measures to stabilize the local housing markets and stimulate demand based on the principle of "housing is for living in, not for speculation".

On the other hand, the government has extended its support for financing for real estate developers. On July 10, the People's Bank of China and the China Banking and Insurance Regulatory Commission issued a notice, encouraging financial institutions to provide pre-existing financing for real estate developers, that is, development loans and trust loans via loan extensions and modified repayment arrangements.

Besides, the Central Financial Work Conference, held on Oct 30-31, said that all kinds of owners should be treated equally and the reasonable financing needs of real estate firms ought to be fulfilled.

Yet due to the general lack of market confidence, many developers still face financial challenges. To boost housing demand, though, first-tier cities such as Beijing and Shanghai reduced the eligibility requirements for "first time homebuyers" on Sept 1. Under this policy, households or individuals will be considered first-time homebuyers and can apply for housing loans as long as no member of the households or the individuals own any property in the city of purchase, regardless of whether they have previously got a home loan or have any loan records.

However, this support policy has had limited impact on transactions due to the overall decline in demand and consumer confidence.

In Shanghai, for example, 15,197 second-hand residential transactions were registered in September, which was an 11 percent increase from August. But the second-hand housing market, too, cooled down, with only 13,294 units being sold in October — a 12.53 percent decline from September.

In November, the sales of second-hand housing rebounded a bit, with 14,077 transactions, 5.89 percent more than in October, but the average transaction price fell to 40,693 yuan per square meter, 3 percent lower on a year-to-year basis.

On Dec 14, both the Beijing and Shanghai municipal governments announced a new round of policy adjustments for the property market, including a lower threshold for buying "ordinary" residential property, lower down payments and reduced mortgage interest rates for first-time homebuyers.

According to the market agency's data, the property markets in the two cities responded positively to the policy changes. But despite such policies boosting sales in the short run, their long-term impacts were limited.

To ensure the long-term stability of the real estate market, the major challenge is to break the vicious circle of weak demand and pessimistic expectations. In other words, the declining demand due to reduced affordability as a result of slowing economic growth and low expectations of property prices rising, along with the rapid increase in housing inventory, depressed price expectations leading to suppressed demand.

To strike a balance between stabilizing the real estate market and preventing speculation, it is essential to recognize the inflexible housing needs and boost demand by offering credit incentives, tax reductions and other measures.

Simultaneously, efforts should be made to expedite the construction of affordable housing. And in areas where conditions permit, the government could consider converting surplus commercial housing into rental housing. This approach can help fulfill the temporary housing needs of new urban residents and young people. And after the market recovers, a rent-to-own plan could be introduced, allowing the government to gradually withdraw its initial investment.

The government could also encourage residents to organize themselves into housing cooperatives and buy unsold housing units at a discount, while retaining a part of the assets as equity and allowing third-party sponsors to provide funding. The unsold housing units can then be converted into shared ownership or cooperative housing involving multiple stakeholders, and when housing prices rise again, the government, real estate firms and third parties can divest their ownership stakes.

In short, a combination of strategies and concerted efforts can strike a balance between stimulating demand and preventing speculation, thus stabilizing the housing market.

Chen Jie is a professor at the School of International& Public Affairs and director of the Center for Housing and Urban-Rural Development at Shanghai Jiao Tong University; and Li Kemeng is a PhD candidate at the same School of International& Public Affairs.

The views don't necessarily represent those of China Daily.