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Bubbles or fundamentals? Modeling provincial house prices in China allowing for cross-sectional dependence

Guangyu Mao and Yan Shen

China Economic Review, 2019, vol. 53, issue C, 53-64

Abstract: This paper provides an empirical analysis of changes in real housing prices in China using quarterly province-level data from 2001 to 2014. It examines the extent to which real housing price at the provincial level are driven by economic fundamentals, such as real per capita disposable income, real interest rate, and size of urban population. The econometric modeling takes explicit account of provincial heterogeneity, nonstationarity of variables, and cross-sectional dependence across provinces by virtue of the Common Correlated Effects model. We find that fundamentals play a less significant role in explaining the house prices in China. Inconsistent with economic theories, the most important fundamental, real income, cannot completely justify the housing price inflation. Therefore, there may be a housing price bubble in the market.

Keywords: Bubbles; Common factors; Cross-sectional dependence; Housing price (search for similar items in EconPapers)
JEL-codes: C23 R31 (search for similar items in EconPapers)
Date: 2019
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China Economic Review is currently edited by B.M. Fleisher, K. X. D. Huang, M.E. Lovely, Y. Wen, X. Zhang and X. Zhu

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