China's housing prices have been growing nearly twice as fast as national income over the past decade, despite a high vacancy rate and a high rate of return to capital. This paper interprets China's housing boom as a rational bubble emerging naturally from its economic transition. The bubble arises because high capital returns driven by resource reallocation are not sustainable in the long run. Rational expectations of a strong future demand for alternative stores of value can thus induce currently productive agents to speculate in the housing market. Our model can quantitatively account for China's paradoxical housing boom.
Chen, Kaiji, and Yi Wen.
"The Great Housing Boom of China."
American Economic Journal: Macroeconomics,
Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Economic Development: Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
Socialist Systems and Transitional Economies: National Income, Product, and Expenditure; Money; Inflation
Socialist Systems and Transitional Economies: Urban, Rural, and Regional Economics
Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand
Housing Supply and Markets