Academic journal article Research in Applied Economics

House Price Bubbles in China

Academic journal article Research in Applied Economics

House Price Bubbles in China

Article excerpt

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.

Keywords: monetary policy; house prices; duration dependent test; speculative bubbles

(ProQuest: ... denotes formulae omitted.)

1. Introduction

In 1994, the former Chairman of the US Federal Reserve Board, Alan Greenspan talked about the central bank should pay more attention to asset price bubbles at the conference on celebrating the 300th anniversary of the founding of Bank of England. Thus it raised the warm discussion on the relationship between asset prices and monetary policy around business cycles and central banks from the late 1990s. Real Estate is one of the most important assets which are owned by enterprises or residents. Because real estate has both consumption and investment characteristics, real estate price fluctuations or bubbles can deeply impact on real economy and financial system stability and also deeply impact other equity prices and financial assets. So the real estate prices fluctuations and bubbles burst raised serious challenge to monetary policy.

Recent years the lack of financial markets regulation and institution deregulation have caused the subprime mortgage market bubble in the United States and spread out internationally which led to the global financial market crisis in year of 2007 and undermine financial stability. Additionally, the European sovereign debt crisis happened in the late 2009. The number of countries such as Italy, Greece and Spain fell in much quickly in its GDP. The tax revenue declined, the government spending increased and real estate bubbles burst, which caused European countries economy fall into recession. The investors have to reconsider about the safety of their investment and relocated their assets away from risky sovereign debts and equities. Although the EU countries used emergency bailouts and try to rescue the economy and banking sectors, there is still no good sign for economy recovery. Furthermore, a large number of bankruptcies of financial institutions caused the capital shortage problems and imposed a negative shock on the real economy in the US and Japan. In order to repay the government debts and pull their economies out of recession, US government is forced to use loose monetary policy, reduce the rates and "print" more money. This option have further weaker the world economy and caused cross border inflation rising risk.

In the late 1970s, China government had implemented a complete welfare-housing system. The constructed welfare housing is under the government administrative control. The low lending and distributing houses to citizens are based on government annual housing plan. Therefore, there is no real estate market existed till year 1998. In July 1998, central government announced the notice on the deepening of housing reform and fastens housing construction policy. …

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