Evergrande may not be China’s “Lehman Brothers moment,” but there are many parallels between the housing crises in China and the United States. Both are due to government control or regulation of land. Both see government planners deflecting attention from their inept policies by blaming someone else. Both have seen resulting remedies fail to do anything about high housing prices.

An Evergrande development that was being planned in 2020.

More than half of China and nearly half the United States are agricultural lands, and in each case only a small portion of the total is actually used for growing crops. Data are not yet available for 2020, but in 2010 about 4 percent of China and 3 percent of the United States were urbanized. Urbanization is no threat to agricultural lands.

Despite this, in the 1960s through the 1980s, a panic over a cropland crisis led several states, starting with Hawaii and followed by California, Oregon, Washington, Florida, and Atlantic states between Massachusetts and Virginia, to pass laws that attempted to save farmlands by curbing low-density suburban development, pejoratively known as sprawl. The laws confiscated, usually without compensation, the rights of rural landowners to develop their lands. In turn, they created an artificial shortage of land for housing.

In the 1970s, every county surrounding San Francisco, for example, drew an urban-growth boundary outside of which is off limits to development. Under California law, these boundaries can’t be moved without someone funding a multi-million-dollar environmental impact report, and no one has ever funded one. Nearly 70 percent of the Bay Area is vacant land that could be used for housing but is illegal to develop.

In China, the government owns all land, but since about 1998 people have been allowed to own homes on land leased from the government, typically for 70 years. The government has been stingy with its leases partly because it fears its own cropland crisis. It has a policy called the red line that requires that at least 480,000 square miles of croplands be protected at all times.

These policies have led urban areas in California and China to be denser than their residents would prefer. Surveys indicate that 80 percent of Americans prefer or aspire to live in single-family homes, preferences that have been strengthened by the pandemic. As much as 77 percent of households in some states do live in such homes, but only 54 percent of households in the Los Angeles area and under 52 percent in the San Francisco Bay Area are in single-family homes. Outside of California, the average density of urban areas in the United States is about 2,200 people per square mile, while in California it is nearly twice that at 4,300 people per square mile.

China’s urban areas average about 6,100 people per square mile. This is not because China is the most populous nation in the world. Despite its high population, China’s overall average population density is only about half of the United Kingdom’s, a third of the Netherlands’, and also less than that of Germany, Italy, and Switzerland. China’s density is about the same as Florida’s and less than that of New York and a half-dozen other states. The Chinese, like Americans, still dream of living in single-family homes.

Government policies have forced density on cities in California and China because both American and communist urban planners believe—for mostly specious reasons—that density is a good thing and they don’t hesitate to use land-use policies to achieve densities that people with automobility wouldn’t choose for themselves. These policies make housing expensive by creating artificial shortages of land and also because the multi-story condominium and apartment buildings that planners favor cost more to build due to increase requirements for steel, concrete, and elevators.

Artificial land shortages also make housing prices more volatile because small changes in demand can lead to large swings in prices. American housing markets rarely saw major price declines before coastal states and municipalities began limiting rural development. Since California cities drew urban-growth boundaries in the 1970s, the state has seen three housing bubbles grow and collapse and is in the midst of a fourth. After China legalized homeownership (on government land) in the 1990s, it saw a housing bubble from 2005–2013 and is now in the midst of a second one.

Volatility is what killed Lehman Brothers. Many people think the investment bank went broke because people stopped paying their mortgages, but that isn’t what happened at all. Like other banks, Lehman was packaging mortgages and selling them as bonds. Ratings agencies such as Standard & Poor’s and Moody’s gave these bonds good ratings because they didn’t understand that recent land-use restrictions had made housing prices more volatile. When the California housing bubble peaked and began to decline in 2006, the ratings agencies realized their mistake and downgraded their bond ratings.

This wouldn’t have immediately mattered to pension funds and other buyers of mortgage bonds, but banks are required to maintain cash reserves for any bonds they hold depending on the rating: a AAA bond required a 0.5 percent reserve, while B bond required an 8 percent reserve. When the ratings were downgraded, Lehman suddenly had to come up with billions of dollars in cash as reserves for bonds that it hadn’t yet sold, and because it was unable to do so it went bankrupt. Other banks would have followed but the government intervened with the Troubled Assets Relief Program.

This is where the Lehman and Evergrande stories differ. Evergrande was running a pyramid sales scheme, asking people to pay 30 percent or greater deposits on houses it planned to build and using the money to build projects that were already underway. The company also sold lots of bonds to pay for the 900 or so projects it had at the end of 2020. In early 2021, China passed new rules known as the three red lines policy (Chinese communists apparently like red lines) that limited how much money leveraged companies like Evergrande could borrow.

China’s goal may have been to rein in capitalism. Or it may have been to make housing more affordable. Either way, it seems likely that the government knew that the three red lines policy would put Evergrande and other property developers into bankruptcy.

In another parallel, however, both Chinese and American planners have successfully deflected the blame for high housing prices onto someone else, thus leading people to ignore the governments’ culpability. The Chinese government blamed speculators, and it passed many regulations aimed at discouraging people from buying homes as investments rather than to live in. In reality, speculators don’t make housing expensive; they merely try to take advantage of rising prices.

In the United States, planners blame high housing prices on single-family zoning. In fact, single-family zoning has been around for more than 100 years and by the 1950s was used by almost every American city except Houston and some of its suburbs. Yet housing didn’t become unaffordable until states and cities began restricting rural development, and it remains affordable in places that haven’t imposed such regulations.

Oregon and California have both passed laws banning single-family zoning. These laws won’t make housing more affordable, but they will help planners achieve their goal of forcing higher densities on people.

In one final parallel, government land-use policies have led to a marked increase in income inequality in both the United States and China. In the United States, income inequality markedly declined in the mid-twentieth century, a period known as the great compression. Not coincidentally, this was also a period of rising homeownership. Income inequality started to rise in the 1970s, a period known as the great divergence. Not coincidentally, that is when many states began passing and implementing rural land-use restrictions. Northwestern University economist Matthew Rognlie has shown that rising income inequality in recent decades is almost solely due to disparities in homeownership and housing prices.

China’s income inequality has also fluctuated in recent years, and much of that is likely due to housing markets as the fluctuations seem to have followed China’s housing bubbles. According to the latest measurements, income inequality in China and the United States are almost identical.

People who care about housing affordability, income inequality, and/​or economic stability need to recognize that government planners in both China and the United States who are attempting to restrict the geographic growth of urban areas are largely responsible for rising housing prices, income inequality, and the resulting economic volatility. These problems will be solved in the United States only when development rights are restored to rural property owners and in China only when the government privatizes most of the nation’s land. For more information about the Evergrande debacle, see my recent policy brief, China’s Red Lines: A Failure of Central Planning.