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The great housing boom of China

Author

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  • Chen, Kaiji

    () (Emory University and Federal Reserve Bank of Atlanta)

  • Wen, Yi

    () (Federal Reserve Bank of St. Louis)

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.

Suggested Citation

  • Chen, Kaiji & Wen, Yi, 2015. "The great housing boom of China," FRB Atlanta CQER Working Paper 2015-3, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedacq:15-03
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    Citations

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    Cited by:

    1. Hanming Fang & Quanlin Gu & Wei Xiong & Li-An Zhou, 2016. "Demystifying the Chinese Housing Boom," NBER Macroeconomics Annual, University of Chicago Press, vol. 30(1), pages 105-166.
    2. Margaret, Davenport & Guido, Cozzi, 2017. "Financial Development and Capital Flows: An Application," MPRA Paper 79965, University Library of Munich, Germany.
    3. Gerlagh, Reyer & Jaimes, Richard & Motavasseli, Ali, 2017. "Global demographic change and climate policies," Discussion Paper 2017-035, Tilburg University, Center for Economic Research.
    4. Wen, Yi & Wu, Jing, 2014. "Withstanding great recession like China," Working Papers 2014-7, Federal Reserve Bank of St. Louis, revised 21 Oct 2017.
    5. Mali Chivakul & Waikei R Lam & Xiaoguang Liu & Wojciech Maliszewski & Alfred Schipke, 2015. "Understanding Residential Real Estate in China," IMF Working Papers 15/84, International Monetary Fund.
    6. Mark Kruger & Kun Mo & Benjamin Sawatzky, 2016. "The Evolution of the Chinese Housing Market and Its Impact on Base Metal Prices," Discussion Papers 16-7, Bank of Canada.
    7. Chun Chang & Kaiji Chen & Daniel F. Waggoner & Tao Zha, 2016. "Trends and Cycles in China's Macroeconomy," NBER Macroeconomics Annual, University of Chicago Press, vol. 30(1), pages 1-84.
    8. Song, Zheng (Michael) & Xiong, Wei, 2018. "Risks in China’s financial system," BOFIT Discussion Papers 1/2018, Bank of Finland, Institute for Economies in Transition.
    9. Alexander Cooper & Arianna Cowling, 2015. "China’s Property Sector," RBA Bulletin, Reserve Bank of Australia, pages 45-54, March.
    10. Kerwin Kofi Charles & Erik Hurst & Matthew J. Notowidigdo, 2015. "Housing Booms and Busts, Labor Market Opportunities, and College Attendance," NBER Working Papers 21587, National Bureau of Economic Research, Inc.
    11. Makram El-Shagi & Lunan Jiang, 2017. "China Monetary Policy Transmission in China: Dual Shocks with Dual Bond Markets," CFDS Discussion Paper Series 2017/2, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
    12. Jia, Pengfei & Lim, King Yoong, 2018. "Tax Policy and Toxic Housing Bubbles in China," MPRA Paper 86576, University Library of Munich, Germany.

    More about this item

    Keywords

    housing bubble; resource misallocation; Chinese economy; development; economic transition;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P23 - Economic Systems - - Socialist Systems and Transition Economies - - - Factor and Product Markets; Industry Studies; Population
    • P24 - Economic Systems - - Socialist Systems and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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