The market transition in China has resulted in significant social inequality, including housing inequality, in a formerly egalitarian society. This article provides both a conceptual framework and an empirical analysis of housing inequality in transitional urban China. Using the 1995 1% Population Survey and the 2000 Census data for Beijing, it shows that there was significant housing inequality between different socio‐economic and institutional groups, and that the reforms in the late 1990s aggravated it. While emerging market mechanisms began to contribute to housing inequality, socialist institutions such as the household registration (hukou) system continued to be significant in the late 1990s, although there is evidence of the declining importance of other institutional factors such as political status. This study contributes to the market transition debate by arguing that different elements of the socialist institutions follow different paths in the reform and thus have different impacts on social inequality.