Bubble or riddle? An asset-pricing approach evaluation on China's housing market

Abstract

Rapid house price growth and high price-to-income ratio in major Chinese cities have aroused a hot debate on whether there is an asset bubble in China's residential housing market. To investigate this question, we employ an equilibrium asset-pricing approach, which suggests a non-arbitrage condition on the rent-to-price ratio. This ratio should be equal to the difference between the user cost of housing capital and the expected appreciation in house prices. Using a novel micro-level data set on pair-wise matched price-to-rent ratio collected in the fourth quarter of 2013, and forecasting the expected house price appreciation based on fundamental factors, our empirical exercises do not suggest the existence of a house price bubble at the national level. However, this conclusion highly depends on the expected income growth rate and may not apply to individual markets.