Abstract
It has been a hot topic concerning about whether price bubbles exist in the housing market in several cities in China or otherwise. However, much of the debate lacks convincing evidence. This paper discusses the two factors which may lead the housing price to deviate from its fundamental value: rational bubble and economic irrationality. Also, the paper considers the price‐rent ratio as a valid indicator in reflecting the rationality of the housing price. Based on an international comparative study and the Income Capitalization Method, this paper will show that the proper interval of the price‐rent ratio in China's housing market should be around 150–200. At the end of this paper, an empirical study will be presented after an alternative measurement method for China's housing market is proposed. It will illustrate that housing prices in Shanghai and Hangzhou are overvalued while that in Beijing and Guangzhou are comparatively closer to the proper interval.
Highlights
Price-rent ratio refers to the ratio of the transaction price of housing to the rental value of the house1
Through the study above on price-rent ratios in four cities in China, the findings are as follows: 1. As a whole, the price-rent ratios in Beijing and Guangzhou are in the proper interval, while those in Shanghai and Hangzhou are notably higher than rational level9
From the aspects of rational bubbles caused by speculative activities in the housing market and consumers economic irrationality, this paper has explained why the housing price often deviates from its fundamental value, and has put forward an idea that the pricerent ratio is an indicator for such deviations
Summary
Price-rent ratio refers to the ratio of the transaction price of housing (price for short) to the rental value of the house (rent for short). The rent in an equilibrium market is comparatively steady and can be considered as an actual reflection of the relationship between housing supply and housing demand. Pricerent ratio can be regarded as an indicator in measuring the price bubbles in the housing market (Tian Chuanhao, 2003) 3. This paper firstly describes the intrinsic mechanism such as rational bubbles and economic irrationality, both of which influence the price-rent ratio. Based on an international comparative study and the Income Capitalization Method, this paper intends to find out the proper interval of price-rent ratio in China. Due to a significant structural difference between the housing transaction market and the housing leasing market in China, an alternative measurement method of price-rent ratio is proposed. The paper presents an empirical study on current price-rent ratio in Beijing, Shanghai, Guangzhou and Hangzhou
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