The trend and cycle components of China’s housing prices: a new decomposition method

The paper proposes a novel hybrid method that extends previous work incorporating the fractionally cointegrated vector autoregressive and the permanent-transitory decomposition model. Using the hybrid method, we investigate whether the rapid rise in China’s housing prices is a trend or cyclical fluctuation as well as whether there exists a housing price bubble. The findings indicate there exists a fractional cointegration relationship between housing prices and macroeconomic fundamentals in China, and that the fundamental value of housing prices is determined by macroeconomic factors. In particular, the upward trend in China’s housing prices has shifted and decelerated since 2012, in line with GDP and money supply. Moreover, we provide evidence of the existence of a housing price bubble in China since 2012, particularly during the 2015–2018 period. We demonstrate that the hybrid model has a superior forecasting performance and decomposes the trend and cycle components more accurately than the conventional methods when estimating a system of possibly fractional cointegration relationship.