Is there a housing bubble in China

TL;DR

This paper investigates potential housing bubbles in nine Chinese cities by analyzing price deviations from fundamentals and speculative behaviors, emphasizing the importance of city-specific policies based on bubble heterogeneity.

Contribution

It introduces a dual-method approach combining cointegration tests and LPPLS modeling to diagnose housing bubbles and highlights the need for tailored policy responses.

Findings

Evidence of price deviations from fundamentals in some cities.

Detection of speculative behaviors indicating bubble signatures.

Heterogeneity suggests different bubble characteristics across cities.

Abstract

There is a growing concern in recent years over the potential formation of bubbles in the Chinese real estate market. This paper aims to conduct a series of bubble diagnostic analysis over nine representative Chinese cities from two aspects. First, we investigate whether the prices had been significantly deviating from economic fundamentals by applying a standard Engle-Granger cointegration test. Second, we apply the Log-Periodic-Power-Law-Singularity (LPPLS) model to detect whether there is any evidence of unsustainable, self-reinforcing speculative behaviours amongst the price series. We propose that, given the heterogeneity that exists amongst cities with different types of bubble signatures, it is vital to conduct bubble diagnostic tests and implement relevant policies toward specific bubble characteristics, rather than enforcing one-that-fits-for-all type policy that does not take into account such heterogeneity.