The Kuznets Cycle: Positioning the Long Real Estate Cycle and the Four Layers of Housing Prices

The Kuznets cycle refers to a long cycle driven primarily by real estate and construction, empirically running roughly 20 years per round. This framework positions the long real estate cycle (ascending / descending / bottoming) by comparing the complete 1991–2010 U.S. round with China’s progression from the 1998 housing reform through the 2013 peak in new construction starts, and uses a four-layer framework of “desirable / reasonable / unreasonable without a bubble / unreasonable with a bubble” to decompose the multi-level logical validity of housing-price levels.

The Framework As It Stands

This section is compiled from research drafts: the original framework’s structure, terminology, and key expressions are preserved, with editorial bridging and supplementary factual annotations; diagrams are drawn by the compiler following the structure of the original text.

I. Definition of the Kuznets Cycle and Historical Reference

Kuznets cycle = a cycle driven by real estate and construction, empirically running roughly 20 years per round.

U.S. reference round: 1991–2010, approximately 20 years (ascending roughly 16 years, descending roughly 4 years).

China’s progress in the current round: the 1998 housing reform launched the ascending phase → new real estate construction peaked in 2013, an ascent of roughly 14–15 years; after 2013 the descending phase began (approximately 5–6 years as of the course’s reference point).

Over the past decade, capital markets have essentially been earning the returns of the Kuznets cycle; active industries have largely been in the upstream or downstream of this cycle.

II. Three Characteristics of a Bottom

This framework judges that the current round’s true bottom is expected in 2019 or 2020 (course reference point: December 2018), corresponding to three characteristics appearing simultaneously:

Investment growing slowly but steadily: real estate investment enters a phase of slow but stable growth (individual judgment: possibly single-digit growth).
Old-to-new driver switchover in sales: the old driver = first-time home purchases by those born 1980–1987; the new driver = second-child school-district housing + high-end properties; once the switchover is complete, growth volume declines but the structure improves.
Long-term mechanisms take hold: both the supply side (rent-and-purchase parity + share of affordable housing in tier-one and tier-two cities rising, the model possibly approximating Singapore or Germany) and the demand side (property tax) are implemented.

III. Industry Maturation, Not Collapse

Real estate will not collapse outright: by analogy with baijiu — after 2012 baijiu grew at low single-digit rates, but leading brands’ growth was not low; those without brand premium exited, and the share of the top ten or top twenty companies rose, with the industry moving toward a mature, specialized, and branded state. The same applies to the descending phase of the real estate long cycle; the key observation variable is the market-share concentration of the top twenty companies.

IV. The Four-Layer Housing Price Framework

Layer 1   Desirable house price     Price-to-income ratio, rental yield constraint
          (e.g., annual rent CNY 100,000 × 20× PE → house price CNY 2,000,000)
          ↓ In a high-to-medium growth economy M2 growth is high; assets preserve value with M2
Layer 2   Reasonable house price    One step above the desirable price; not desirable but reasonable
          ↓ Land transfer revenue used for urban construction; home purchase includes cost of completed infrastructure
Layer 3   Unreasonable but no bubble   Urban-construction / radius-expansion costs passed on
          ↓ Residents speculate upon seeing land prices / house prices rise
Layer 4   Unreasonable and has a bubble   Speculative expectations self-fulfilling, driving prices further

Key inference: if house prices correct, the desirable house price (Layer 1) must not be used as the final benchmark; the residual validity of Layer 2 (the M2 value-preservation logic) and Layer 3 (urban-construction costs) must be taken into account. Which layer the correction bottoms at depends on M2 growth at that time, the progress of long-term mechanisms, and whether speculative expectations have been absorbed.

Timing note: the U.S.–China progress comparison and the “2019 or 2020 bottom” judgment are both historical experience and judgments made at the time of the course (December 2018); to determine which phase the current situation is in, current real estate investment, new-start, and sales data must be used — this should not be cited as a current-situation claim.

Compiler’s Perspective

Coordinates: Category = Cognitive Algorithms · axis_h = Fa · axis_v = Its Place in the Whole

Connection layer: Before applying this framework, the most common operating path is “use the desirable house price (annual rent × 20× PE) directly as the benchmark for the end-point of a house-price correction” — the logic looks rigorous (price-to-income ratio and rental yield both have data), but the framework points out that this collapses the four layers into one. Using the desirable value of CNY 2,000,000 corresponding to annual rent of CNY 100,000 as the terminal benchmark ignores two things: first, in an economy with a persistently high M2 growth rate, the Layer-2 “reasonable house price” step has its own independent logic and the correction will not fall all the way through to Layer 1; second, the cost of urban infrastructure improvement has already been embedded in the purchase price (Layer 3), and this portion will not disappear because of market correction. This specific error leads investors to underestimate the near-term support level of actual transaction prices, prematurely call the bottom, and incur repeated stop-losses.

The “industry collapse” narrative also needs to be corrected: the baijiu analogy given in the framework carries specific data — after 2012 baijiu entered low-single-digit growth, enterprises without brand premium exited, and the top ten / top twenty companies’ share rose. The corresponding observational action for real estate is: stop watching the year-on-year change in total sales area; instead watch top-twenty market concentration — this is the structural signal of industry maturation in a descending phase, not a signal of decline.

Proprietary incremental insight: The asymmetric judgment in this entry is that the old-to-new driver switchover is the most forward-looking of the three bottom characteristics — slow, stable growth in investment and the implementation of long-term mechanisms are both lagging confirmation signals, but the decline in first-time buyer (born 1980–1987, see The Demographic Cycle: Twenty Years of Structural Change and the Engineer Dividend) share, and the rising transaction share of second-child school-district housing and high-end properties, can be tracked monthly. The three characteristics are not triggered simultaneously; the switchover is the one that happens first.

Relationship to The Juglar Cycle: The Equipment Capex Mid-Cycle and Its ROE Essence: the Kuznets cycle (real estate, ~20 years) is the outer shell of a longer cycle; the Juglar cycle (equipment, 7–10 years) will still generate local capital-expenditure expansions and contractions within the descending phase of the real estate long cycle. Only by superimposing the two can one explain the cycle mismatch phenomenon of “real estate in a prolonged bear but manufacturing locally hot.”

Sources

Compiled draft z-0105 · collected 2026-07
Kuznets, S. (1930). Secular Movements in Production and Prices. Boston: Houghton Mifflin.
Burns, A.F. (1934). Production Trends in the United States since 1870. New York: NBER.

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