The asymmetric adjustment between demand and supply means more houses will be built but fewer can be sold. That will lead to increasingly higher stocks than the market can handle. The longer such a situation persists, the greater will be the risks to the real estate and financing markets.

Therefore, local governments have to pull the brakes on the “bailout” policy by encouraging developers to reduce housing prices in order to boost demand, while curbing investment as a synchronized adjustment to cut supply. This will speed up the process for the market to clear the stocks.

While trying to salvage the housing market, we cannot rely on an anti-market force to buck the trend. When demand weakens amid adjustments, we have to act on price and supply. Once housing prices drop, demand will rise. Stabilizing the price and investment will only lead to an increasingly shrinking demand, hindering the economic cycle and stagnating the real estate market amid the lack of capital liquidity.

There’s nothing to fear when housing prices and investment drop because of adjustments. It is just a process to squeeze out bubbles and prevent financial risks. And the long-term existence of real estate bubbles can block industrial upgrading, expand the income gap and impede urbanization. Good news will come along with such adjustments. For instance, it will help boost the urbanization drive, narrow people’s income gap and propel the development of the real economy. In particular, it will help more funds and resources to flow into industrial upgrading and for innovations.

The author is a researcher at and vice-director of the Department of Policymaking Consultation of the Chinese Academy of Governance.