The Great Housing Boom of China
FRB of St. Louis Working Paper No. 2014-022A
59 Pages Posted: 24 Aug 2014
Date Written: August 22, 2014
This paper provides a theory to explain the paradoxical features of the great housing boom in China — the persistently faster-than-GDP housing price growth, exceptionally high capital returns, and excessive vacancy rates. The expectation that high capital returns driven mainly by resource reallocation are not sustainable in the long run can induce the very productive entrepreneurs to speculate in housing during economic transition. This creates a self-fulfilling growing housing bubble, which can create severe resource misallocation. A calibrated version of the theory accounts quantitatively for both the growth dynamics of house prices and other salient features of the recent Chinese experience.
Keywords: Housing Bubble, Resource Misallocation, Chinese Economy, Development, Economic Transition
JEL Classification: E22, E23, O11, O16, P23, P24, R31
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