An Empirical Analysis of House Price Bubble: A Case Study of Beijing Housing Market

Abstract

Increases in house prices can lead to higher house price volatility, a significant determinant of default and the prepayment of housing loans (Miles, 2008). Many researchers believe that significant growth in house price has the potential to generate a house price bubble. The bursting of a house price bubble is likely to endanger the stability of the country’s real economy.

China experienced substantial increases in house prices at the end of 1990s. In Beijing, house prices increased dramatically following the liberalization of China’s housing market in 1998, and especially so after reforms in 2004. The significant growth of Beijing house prices could have generated a house price bubble, thus endangering the stability of the Beijing housing market and thereby the overall Chinese economy.

This paper investigates whether a bubble existed in the Beijing housing market from 1998 to 2010, using economic fundamental variables such as interest rates, inflation, and cost of supply. Results of the analysis revealed that the Beijing house price index was significantly larger than the equilibrium value, based on the relative economic fundamental variables (income, inflation, interest rate and construction cost) during 2004 to 2007. This result is similar to the findings of Hou (2009), where nearly 75 percent of the changes in Beijing house price were thought to be explained by the economic variables used in the models.