Bubble economics: how big a shock to China’s real estate sector will throw the country into recession, and why does it matter?

Purpose - By modelling China’s property price changes and their effect on GDP, this study aims to develop a more general model of the costs and benefits driving price bubbles. Design/methodology/approach - The authors develop a five-sector dynamic model (using data from China and seven other comparator jurisdictions), resulting in a bubble risk factor. The authors then correlate this risk factor with changes in property prices and resulting changes in GDP. Findings - The authors find that economic structures (the way GDP, property prices and other variables change relative to each other) can change during/after a financial crisis. The authors also find that price disequilibria can help predict the risk of a property price fall – which thus reverberates into GDP change. Originality/value - To the best of the authors’ knowledge, no dynamic models of price bubbles exist (though many exist of financial bubbles). The authors provide both theoretical novelties (such as providing a model of risk using non-linear differential equations) and practical ones (showing when we can expect Chinese GDP to fall).