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The great housing boom of China

Listed author(s):
  • Chen, Kaiji

    ()

    (Emory University and Federal Reserve Bank of Atlanta)

  • Wen, Yi

    ()

    (Federal Reserve Bank of St. Louis)

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.

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Paper provided by Federal Reserve Bank of Atlanta in its series FRB Atlanta CQER Working Paper with number 2015-3.

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Length: 67 pages
Date of creation: 01 Nov 2015
Handle: RePEc:fip:fedacq:15-03
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