China’s real estate crisis is worse than it appears.

China’s current economy shows worrying parallels with Japan in the 1990s, when the bursting of the real estate bubble triggered a long phase of stagnation. However, Japan’s so-called “lost decades” were not the inevitable result of broad trends, but rather of policy mistakes caused by misdiagnoses of the economic challenges. The key question now is whether Chinese leaders will make the same errors.

In Japan, the housing bubble was preceded by a sharp rise in the house price-to-income ratio, climbing in Tokyo from eight times in 1985 to eighteen times in 1990. This process was fueled by factors such as changes to land taxation, financial deregulation, and poor coordination between monetary and fiscal policies. Strong demand from first-time buyers, who were typically aged between 39 and 43, also played a crucial role.

The rise in prices made homeowners feel wealthier, boosting consumption, which in turn pushed up prices of goods and services as well as stock market values. This generated more jobs and reduced unemployment. However, demand for new housing soon fell, and demographic changes proved decisive. By 1991, the share of Japanese over 65 had reached 13%, leading to a decline in first-time buyers. Housing values collapsed, the stock market plunged, and the country entered a deflationary phase marked by falling birth rates and rising unemployment.

The real issue—a persistent demographic shift—was misinterpreted by authorities, who responded as though it were a cyclical crisis. They believed the root problem was the strength of the yen after the 1985 Plaza Accord, in which several economies agreed to devalue the dollar. To limit the yen’s appreciation, money was printed, interest rates were cut, and public spending increased, alongside quantitative easing measures. These policies, coupled with a new surge in housing buyers around 2001, pushed real estate prices even higher, deepening the problem. Starting a family became more expensive, which delayed marriages and reduced the birth rate. The government introduced policies to boost births, such as child allowances and improved childcare, but only achieved a modest increase: fertility rose from 1.26 children per woman in 2005 to 1.45 a decade later.

Then-prime minister Shinzō Abe set a target fertility rate of 1.8. However, his policies to help women return to work after childbirth failed to offset the impact of ultra-expansionary monetary policy, designed to combat deflation but which continued to drive up housing costs. As a result, marriages declined, and births fell further. In 2023, Japan recorded a very low fertility rate of just 1.15 children per woman.

Historically, Japan benefited from low interest rates and a weak yen due to its reliance on exports. But population aging and labor force decline are now pushing wages up and fueling inflation, weakening the industrial sector and turning Japan into a country with a trade deficit, increasingly exposed to imported inflation. Thus, Japan has shifted from a deflation trap to a long-term inflation trap, eroding household purchasing power and worsening demographic decline. The attempt to overcome the “lost decades” seems to be steering Japan toward an even more prolonged crisis.

This situation should serve as a warning to China, which is experiencing its own housing adjustment and facing severe demographic challenges. In recent years, rapid urbanization, policies restricting land supply, local governments’ reliance on land sales for revenue, and high growth expectations fueled a steady rise in housing prices. Young Chinese buyers, due to decades of birth control policies, also tended to purchase homes at a significantly younger age than their Japanese counterparts.

However, the number of potential buyers in Chinese cities peaked in 2019, just before the real estate bubble burst. Today, the construction sector—which accounted for 25% of China’s GDP and 38% of state revenues between 2020 and 2021—is in deep recession: demand has collapsed, oversupply is evident, and construction activity has plummeted. The fall in housing prices has drastically reduced household wealth, with losses comparable to the country’s entire annual output, hitting consumption, employment, and investment hard.

China’s crisis could prove even more severe than Japan’s. To begin with, the Chinese property bubble was significantly larger: in 2020, housing investment relative to GDP was 50% higher than Japan’s in 1990, and 70% of Chinese household wealth was in real estate, compared with 50% in Japan in the 1990s. The house price-to-income ratio is also far higher in China today. Moreover, China’s fertility rate is lower than Japan’s. Whereas Japan experienced a rebound in first-time buyers a decade after its crisis, China cannot expect the same. China’s population is aging faster: Japan took almost three decades to reach the demographic level that China will hit in less than two. Over the same interval in Japan (1997–2025), GDP growth averaged just 0.6% per year.

China also faces stronger deflationary pressures and higher unemployment than Japan. In 2020, Chinese household consumption represented only 38% of GDP, compared to 50% in Japan in 1990. What is most concerning is that Chinese authorities continue to defend growth targets of 5% or even 8%, applying short-term measures such as social housing programs or monetary stimulus, while failing to tackle the deep structural problems of their economy. As Hegel warned, the only thing history teaches us is that nations seem not to learn from it.