House Price Bubbles in China

Abstract

This paper uses a vector of macroeconomic and monetary policy fundamental variables to investigate the existence of speculative bubbles on national residential house market in China over the period from Mar.1998 to Feb.2013.In the past few years, except the quantitative easing policy was implemented in USA, many monetary policy instruments also have been used on the asset markets in China, such as expansionary of monetary supply and lower benchmark interest rate and lending rate. These led to the hyperinflation happened in China and property price increased dramatically after 2009. Because of the booming in the real estate industry, we are interested in whether there is a housing bubble existing in the market. Three sets of bubble attributes are examined, including unit root test and co-integration procedures, we find no evidence of rational bubbles in the national housing market. The tests for duration dependence in the negative returns on house prices suggest that China housing market is not affected by rational bubbles. Overall, this essay proposes monetary policy and macroeconomic variables are important factors for the increasing of housing prices. It is also necessary for monetarists to consider about the impact of interest rates on housing prices.