Abstract
The recent, dramatic increases in house prices have led to considerable attention being focused on housing markets in China. Using a unique dataset of city-level house prices and rents, this paper investigates the presence of price bubbles in major Chinese city housing markets. Our findings show evidence of price bubbles in most housing markets, even though the bubbles might be, to a large extent, mitigated by strong government intervention. In order to distinguish rational bubbles from irrational bubbles, we extend the existing work to allow a deterministic time trend and break points in the unit root test of house price-rent ratios. As a consequence, our results demonstrate that the price-rent ratios in most of the sample cities are no longer non-stationary, implying the non-existence of rational bubbles in the housing markets.
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