Is There a Bubble in the Chinese Housing Market?

Abstract

For many analysts, the Chinese economy is being spurred on by a bubble in the housing market, probably driven by the fiscal stimulus package and massive credit expansion, with potentially adverse effects on the real economy. The house price development is investigated by panel cointegration techniques. Evidence is based on a data-set for 35 major cities. Cointegration is detected between real house prices and a set of macroeconomic determinants. The results indicate that the bubble is less than 15 per cent of the equilibrium value implied by the fundamentals at the end of 2010. The bubble is particularly huge in the cities in the south-east coastal areas and special economic zones. While the spillovers from real house prices to consumer price index (CPI) inflation are significant at the margin, gross domestic product (GDP) growth may not be heavily affected. Thus, a decline of the bubble will likely have only modest effects on the real economy.