Housing price bubbles and inter-provincial spillover: Evidence from China

Abstract

The soaring housing prices in many provinces of China have recently attracted increasing attention. This study addresses the questions of whether there are housing price bubbles in the provinces and whether the bubbles are spatially contagious. We adopt a unit root, cointegration test that uses structural changes and loan-to-income ratios to test housing rational bubbles and a vector error correction model (VECM), the Impulse Response Function, and Granger causality to investigate potential contagion and spillover effects from core to peripheral provinces. Housing price data from 28 provinces in China, ranging from the first quarter of 2000 to the fourth quarter of 2012, are analyzed. First, it is found that most of the provinces do have bubbles and affordability problems. Second, housing prices in provinces that were within the same potentially contagious region were cointegrated together. Third, spillover effects existed in contagious regions around Beijing and Shanghai, where each province has severe bubbles and affordability problems.