An analysis of China's "three red lines" property rules' impact on local housing prices

Abstract

What are the economic consequences of governments employing administrative policies to achieve supply-side deleveraging? This paper explores the impact of deleveraging policies leading to liquidity crises and local real estate prices crash in China, using the "Three Red Lines" policy for the real estate sector implemented in 2020 as a case study. Utilizing hand-collected project and land level data, we constructed city-level Three Red Lines (TRL) risk exposure indicators. Our findings reveal that after the implementation of the TRL policy, cities with higher TRL risk exposure experienced an overall housing price decline of 26%-28%, and the secondary housing market housing price index, fell by 31.8%-33.6%. It was only after the TRL policy was implemented that it emerged as a risk factor, contributing to the observed decrease in housing prices in cities with greater TRL risk exposure. This study highlights the significant economic consequence of administrative deleveraging in developing countries and uncover the critical role of supply-side risk factors in determining housing market prices.