Working Paper

The great housing boom of China

Abstract: 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.

Keywords: Housing Bubble; Resource Misallocation; Chinese Economy; Development; economic transition;

JEL Classification: E22; E23; O11; O16; P23; P24; R31;

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2015-09-27

Number: 2014-22

Pages: 51 pages