The Great Housing Boom of China

68 Pages Posted: 6 Oct 2015

See all articles by Kaiji Chen

Kaiji Chen

Emory University - Department of Economics; Federal Reserve Bank of Atlanta

Yi Wen

Federal Reserve Bank of St. Louis - Research Department; Tsinghua University

Multiple version iconThere are 2 versions of this paper

Date Written: 2014-08-22


China’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 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.

Keywords: Housing Bubble, Resource Misallocation, Chinese Economy, Development, Economic Transition.

JEL Classification: E22, E23, O11, O16, P23, P24, R31

Suggested Citation

Chen, Kaiji and Wen, Yi, The Great Housing Boom of China (2014-08-22). FRB St. Louis Working Paper No. 2014-22, Available at SSRN:

Kaiji Chen (Contact Author)

Emory University - Department of Economics ( email )

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Federal Reserve Bank of Atlanta ( email )

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Yi Wen

Federal Reserve Bank of St. Louis - Research Department ( email )

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314-444-8731 (Fax)

Tsinghua University ( email )

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