Implementing more substantial counter-cyclical policies, particularly reducing policy interest rates, can effectively support housing price increases through three channels.

In the first quarter of this year, China's macroeconomy achieved a strong start against a complex backdrop, with domestic demand playing an enhanced role in driving growth. Fixed-asset investment and foreign trade performance exceeded expectations, yet how to consolidate endogenous growth momentum remains a key focus.

On April 27, Yin Yanlin, academic advisor to the China Finance 40 Forum (CF40) and a member of the National Committee of the Chinese People's Political Consultative Conference, stated at the CF40 Q1 2026 Macro Policy Report release that economic operations began the year with strength and a favorable start. However, insufficient effective demand remains a prominent issue. Boosting confidence should be placed at the center of macro policy to break the negative expectation cycle.

Regarding the real estate sector, a major drag on domestic demand, Zhang Bin, a senior researcher at CF40 and deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, believes the key policy focus should be on stimulating home purchase demand and stabilizing prices. "The key to stabilizing housing prices lies in counter-cyclical policies; the effectiveness of other types of policy tools has become limited. Low interest rates play a crucial role in stabilizing real estate prices."

The latest CF40 thematic report analyzes the significance of interest rate policy in supporting a housing price recovery from multiple dimensions, including lowering the discount rate, reducing risk premiums, and boosting rental income.

Placing Confidence Building at the Core of Macro Policy

Looking at major indicators, Q1 macroeconomic performance overall exceeded expectations.

"Currently, China's macroeconomy is in an early stage of recovery but still relies mainly on exogenous forces like fiscal expenditure and exports for support. Endogenous growth momentum has improved but remains weak, with the real estate market still being the biggest drag on domestic demand," Zhang Bin said.

When discussing the issue of insufficient effective demand, Yin Yanlin mentioned factors such as investment deviating from long-term growth trends, untapped household consumption potential, declining industrial capacity utilization rates, and a fragile foundation for price stabilization.

"So, what exactly is causing the insufficient effective demand? Opinions vary," Yin Yanlin remarked. From a aggregate perspective, he views the current consumption insufficiency not primarily as an income problem, nor an issue of social security or an excessively low consumption rate, and even less a systemic problem.

He particularly emphasized the need to correctly understand that "confidence is more important than gold," while also realizing that currently, "'gold' is more important than confidence"—where "gold" refers to the increased dividends created by economic growth.

"At the fundamental logic level, we need to quickly escape the vicious cycle where 'boosting consumption requires increasing income, increasing income requires creating jobs and raising wages, creating jobs requires economic growth, and economic growth requires boosting consumption'," he argued. He believes that as China's period of high-speed economic growth ended around 2012, slowing economic growth has become a direct cause of insufficient effective demand, forming a negative cycle of "slowing growth - weakening confidence and expectations - slowing demand - further slowing growth - further weakening confidence and expectations."

"A rebound in economic growth rate is key to escaping this cycle, and boosting confidence is key to breaking the negative feedback loop." From the perspective of promoting employment and income growth for urban and rural residents, Yin Yanlin proposed strengthening the virtuous cycle of "expanding domestic demand - economic growth - rising resident income - further expanding domestic demand," and placing confidence building at the center of macro policy.

To this end, he offered several suggestions. First, comprehensively and correctly understand GDP. GDP itself represents economic benefits, and expanding GDP is the material foundation and prerequisite for more "enriching and benefiting the people"; "not focusing solely on GDP" is not equivalent to "not wanting GDP."

Second, pay greater attention to unleashing economic growth potential. GDP must be maintained within a reasonable growth range to leverage the advantage of a supersized market and create a favorable market environment for the transformation and upgrading of traditional industries and the cultivation and growth of emerging and future industries.

Third, increase government investment. Considering this year's fiscal expenditure and front-loaded policy efforts, he suggested that to maintain investment momentum and consolidate and enhance the trend of investment stabilizing and recovering, it is advisable to actively study plans for适时 increasing ultra-long-term special government bond arrangements and subsequent investment projects in the second half of the year to address the problem of "having no rice to cook."

Fourth, implement reserve requirement ratio (RRR) and interest rate cuts at an appropriate time. "To enhance policy effectiveness, it is recommended to implement RRR cuts as soon as possible and carry out meaningful interest rate cuts before the second quarter. This would allow the monetary policy's aggregate function to be utilized more fully, truly stimulating investment and consumer demand, making the appropriately accommodative monetary policy live up to its name. Simultaneously, deepen interest rate marketization reforms, focus on smoothing the monetary policy transmission mechanism, and improve the quality and efficiency of financial services to the real economy," Yin Yanlin said.

The CF40 Q1 Macro Policy Report also recommended: Continue maintaining proactive counter-cyclical policies to sustain the momentum of economic recovery. Before the job market and inflation rate stabilize at target levels, a wait-and-see attitude should not be adopted, and counter-cyclical policy strength should not be weakened prematurely. Regarding the use of counter-cyclical policy tools, more emphasis should be placed on理顺 expectations and price mechanisms, and on cultivating and strengthening market-endogenous forces for expanding domestic demand.

Proposing Policy Rate Cuts to Stabilize Housing Prices

In Q1 this year, the real estate market experienced a minor spring rally, but its sustainability remains to be seen. The aforementioned report shows that from January to March, China's cumulative new construction starts and completed area fell year-on-year by 20.3% and 25.0% respectively, narrowing by 0.1 percentage points and widening by 6.9 percentage points compared to the full year of last year. The cumulative floor area and value of commercial housing sales fell year-on-year by 10.4% and 16.7% respectively, widening by 1.7 and 4.1 percentage points compared to the full year of last year. However, driven by the "small spring," both sales volume and prices showed marginal improvement in March. First-tier cities saw the most noticeable month-on-month price recovery, while the recovery slope in second- and third-tier cities was weaker than the same period last year.

China's real estate market has undergone about five years of deep adjustment, and discussions about an industry inflection point have intensified this year. So, at what stage is the current industry adjustment? How to judge the inflection point and trend?

Zhang Yu, Executive Head of Research at CICC, Managing Director, and Chief Real Estate Analyst, believes that the market is currently showing some signs and hope of a turnaround, but this still depends on policy premises and a foundation of confidence. From a monetary phenomenon perspective, he pointed out that whether liquidity can support housing prices depends on four conditions: whether housing market demand is sufficient, whether payment ability is reasonable, whether there is still room for leverage, and whether supply is tight. Currently, the biggest constraint is inventory. While destocking pressure for new homes has decreased, existing home inventory is the dominant factor now.

Zhang Yu judges that based on the current absorption cycle for existing home inventory, Beijing and Shanghai might be the first to reach an inflection point, but triggering an inflection point in more cities still requires "existing home listings to decrease further and transaction volumes to increase further." This also意味着 that to consolidate the marginal improving trend in the market, continued policy efforts are still needed, with expectation guidance being crucial. He mentioned several potential factors that could hinder the improving trend going forward, including land supply control falling short of expectations, existing home inventory exceeding expectations to the upside, transaction volumes falling short of expectations, interference from regional disparities on the overall trend, and price inertia.

Zhang Bin believes that maintaining reasonable home purchase demand and keeping real estate prices at reasonable levels are key to stabilizing the real estate market. The CF40 thematic report, using a real estate valuation model more suited to China, analyzes that four main factors determine future changes in housing value: the equilibrium real interest rate (negative correlation), inflation rate (positive correlation), the relative price of housing services, and the risk premium (negative correlation). Since 2021, the primary reason for China's housing price decline is that the drop in interest rates has been insufficient to offset the decline in housing rents and the consequent rise in risk premium, leading to lower housing valuations.

Zhang Bin stated that compared to policies focusing on the supply side and developer debt risks, policies targeting the demand side like easing purchase and sale restrictions, and market-based自发 clearing solutions, have significant uncertainty regarding their effectiveness. Implementing more substantial counter-cyclical policies, especially reducing policy interest rates, can effectively support housing price recovery through three channels: First, lower interest rates help improve valuations; Second, they change the price level, and rental changes during this process also boost valuations; Third, they lead to a decrease in the risk premium, thereby increasing valuation. The report analysis judges that "under a neutral scenario, with steady growth in inflation and rents, housing prices in Beijing, Shanghai, and Shenzhen still have room to rise."

However, since the beginning of this year, market liquidity has remained unexpectedly loose, with money market rates and negotiable certificate of deposit rates continuing to run at low levels, and government bond yields falling significantly—the 10-year government bond yield once fell below 1.75%. Discussions have increased regarding whether RRR and interest rate cuts are necessary and whether they would still be effective.

"Many seem to have this question: since liquidity is already ample, why would RRR and interest rate cuts still be needed?" Yin Yanlin believes that the current cost of funds has not yet fallen to a level that can stimulate investment and consumption. Nominal interest rates are still higher than market rates, indicating there is room for RRR and interest rate cuts. "Under the current circumstances of counter-cyclical adjustment, monetary policy is more effective than fiscal policy. Compared to the 'targeted drip irrigation' of fiscal policy, monetary policy has a broader impact. It is important to lower the cost of funds, change market expectations, and make people willing to borrow and dare to invest," he said. In his view, the year-on-year decrease in household loans and medium-to-long-term corporate loans in Q1本质上 reflects insufficient effective credit demand, behind which lies the interest rate not fully leveraging its role.