The Great Housing Boom of China
68 Pages Posted: 6 Oct 2015
Date Written: 2014-08-22
Chinaâ€™s housing prices have been growing nearly twice as fast as national income in the past decade despite (i) a phenomenal rate of return to capital and (ii) an alarmingly high vacancy rate. This paper interprets such a prolonged paradoxical housing boom as a rational bubble that emerges naturally from Chinaâ€™s large-scale economic transitionÂ— 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 Chinaâ€™s massive Â“ghost apartmentÂ” phenomenon and decade-long faster-than-income growth in housing prices despite high capital returns.
Keywords: Housing Bubble, Resource Misallocation, Chinese Economy, Development, Economic Transition.
JEL Classification: E22, E23, O11, O16, P23, P24, R31
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