Bubbles in China’s Housing Market

Abstract

The housing market in China has been booming since the housing reform in the 1990s. This has raised concerns around the world that the Chinese housing market is a bubble about to burst, particularly after the 2008 Global Financial Crisis which was triggered by a housing bubble burst. After implementing a number of empirical methods with panel data that cover 30 provinces/municipalities from 2002 to 2020, the results show that house price is cointegrated with the relevant market fundamentals in the long run. At the same time, short-run fluctuations and deviations in house prices from market fundamentals also exist. The estimation results identify two distinct features of the housing bubble. The first feature is that there are two obvious bubble periods. The first bubble period is from 2009 to 2013 and the second bubble period is from 2017 to 2020. The second feature is that the size of the bubble varies among the different regions. The largest bubble occurred in Hainan province in 2010, which is as large as 40% of the equilibrium value determined by market fundamentals. As for the national average, the largest bubble is also recorded in 2010, the size of which is 11% of the equilibrium value determined by market fundamentals.

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