Aaltodoc publication archive (Aalto University institutional repository)
School of Business | Department of Economics | Economics | 2014
Thesis number: 13703
Is there a bubble in Chinese housing market? Empirical study on Chinese major housing markets
|Title:||Is there a bubble in Chinese housing market? Empirical study on Chinese major housing markets|
|Year:||2014 Language: eng|
|Department:||Department of Economics|
|Index terms:||taloustieteet; economic science; asunnot; apartments; kiinteistöt; real estates; markkinat; markets; hinnat; prices; Kiina; China; Yhdysvallat; United States|
» hse_ethesis_13703.pdf size:2 MB (1900134)
|Key terms:||Housing bubble; User cost formula; US housing bubble; ADF test; Cross-sectional dependence test; Cross-sectional ADF test; Panel data cointegration test|
This paper investigates whether there is bubble in Chinese housing market, a question that has attracted domestic and global attention in recent years. Study of this paper focuses on four glamorous housing markets in Beijing, Shanghai, Guangzhou and Shenzhen with data spreading from 2005 to 2013.
Beginning with definition of bubble this paper summarizes various strands of bubble definition and bases study on definition featured by deviation from fundamentals. Then after comparing previous studies on housing bubble and introducing features of Chinese housing markets this paper presents analysis on three conventional ratios of house price dynamics: price-income ratio, price-rent ratio and imputed-actual rent ratio. For each of the three ratios comparison between current China and bubble-phase US is carried on and results show that price-income ratio and imputed-actual rent ratio are both considerably higher than the two ratios for US housing market during its bubble phase while only price-rent ratio in Beijing housing market displays comparable level with that in bubble-phase US. And ADF test on stationarity is also conducted on first two ratios and results show that price-income ratio is non-stationary in all of the four markets while price-rent ratio is only non-stationary in Beijing and Shanghai. The other perspective of detecting bubble is cointegration model that is constructed in this paper to test if economic fundamentals- local GDP, disposable income, rent, stock index, vacant dwelling and land purchase- can justify the high house prices in the four markets. Methodology underlying this cointegration model is panel cointegration test that has proved reliable after being employed to test US bubble in previous studies. Results of cointegration model show that house price has deviated from set of economic fundamentals since test statistic obviously lies outside critical interval.
After employing various methods that can be found in incumbent literature on housing bubble, final conclusion of this paper is that there exists bubble in Chinese major housing markets. However, one bold suppose about this bubble is that due to inelastic housing demand and exuberance of Chinese aggregate economy the bubble will not burst in near future.
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