Is There a Housing Bubble in China?

Abstract

There is a growing concern in recent years over the potential formation of bubbles in the Chinese real estate market. This paper aims to conduct a series of bubble diagnostic analysis over nine representative Chinese cities from two aspects. First, we investigate whether the prices had been significantly deviating from economic fundamentals by applying a standard Engle-Granger cointegration test. Second, we apply the Log-Periodic-Power-Law-Singularity (LPPLS) model to detect whether there is any evidence of unsustainable, self-reinforcing speculative behaviours amongst the price series. We propose that, given the heterogeneity that exists amongst cities with different types of bubble signatures, it is vital to conduct bubble diagnostic tests and implement relevant policies toward specific bubble characteristics, rather than enforcing one-that-fits-for-all type policy that does not take into account such heterogeneity.

Keywords: housing bubble, Log-Period-Power-Law-Singularity, bubble prediction, the Chinese real estate market

JEL Classification: F37, G01, G17