Abstract
China is experiencing rapid increases in house prices similar in magnitude to that observed in the US housing market bubble. We use a simple vector autoregression model (VAR) to compare housing market dynamics in these two countries. We find that the US housing market responds very strongly to interest rate shocks and very little to money supply shocks. In contrast, the Chinese housing market responds strongly to both interest rate and money supply shocks. An inflation shock produces a larger response of house prices in China than in the US, and changes in house prices have a much stronger wealth effect in China than in the US. A major decline of house prices in China is likely to have a much bigger impact on the Chinese economy. Monetary policy in China needs to reply on both interest rate and quantitative measures to curb unsustainable increases in house prices.
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