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The great housing boom of China

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  • Kaiji Chen
  • Yi Wen

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

  • Kaiji Chen & Yi Wen, 2015. "The great housing boom of China," FRB Atlanta CQER Working Paper 2015-3, Federal Reserve Bank of Atlanta, revised 01 Nov 2015.
  • Handle: RePEc:fip:fedacq:15-03
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    More about this item

    Keywords

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

    JEL classification:

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

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