An Empirical Study on the Relationship between Housing Price Bubbles and Urban Growth

Abstract

The continuous and prompt rising of commercial housing sale price in many Chinese cities since 2003 caused a broad controversy on whether there exists a bubble in Chinese real estate market. Shanghai is a most disputable urban on bubble issue. According to the price bubble theory, the existence of a bubble can be interpreted from abnormal interactions between housing prices and market fundamentals. This paper conducts an empirical analysis on the causality between urban housing price and urban fundamental factors in Shanghai through econometrics models including unit root test, Granger causality test. Urban fundamental factors reflect market basis of housing price resulting from urban growth. They are urban residents' disposable income and urban population growth rate. These variables are time series from 1994 to 2005. The result indicates that urban population growth and income don't Granger cause housing price. In other words, the present housing price in Shanghai overruns the urban growth fundamentals. Therefore, there is a price bubble in Shanghai real estate market.