The great housing boom of China

Kaiji Chen and Yi Wen

No 2015-3, FRB Atlanta CQER Working Paper from Federal Reserve Bank of Atlanta

Abstract: China's housing prices have been growing nearly twice as fast as national income in the past decade despite (1) a phenomenal rate of return to capital and (2) an alarmingly high vacancy rate. This paper interprets such a prolonged paradoxical housing boom as a rational bubble that emerges naturally from China's large-scale economic transition, featuring an exceptionally high rate of return to capital driven by massive resource reallocation. Because such primarily resource-reallocation-driven high capital returns are not sustainable in the long run, expectations of high future demand for alternative stores of value can induce even the currently most productive agents to speculate in the housing market, even if housing provides no rents or utilities. We show that such speculative investment behavior can create a self-fulfilling housing bubble that grows much faster than the national income during an economic transition, thus explaining China's massive \"ghost apartment\" phenomenon and decade-long faster-than-income growth in housing prices despite high capital returns.

Keywords: housing bubbles; resource misallocation; Chinese economy; development; economic transition (search for similar items in EconPapers)
JEL-codes: E22 E23 O11 O16 P23 P24 R31 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2015-11-01
New Economics Papers: this item is included in nep-cna, nep-mac, nep-tra and nep-ure
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Related works:
Journal Article: The Great Housing Boom of China (2017)
Working Paper: The great housing boom of China (2014)
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