The role of price spillovers: what is different in China

Abstract

The rapid pace of change in China’s housing market has called particular attention. This paper studies how the housing boom in China was transmitted via spillovers from one local market to another between 2003 and 2012, an episode during which housing prices increased rapidly. We identify the beginning of housing booms of a focal market as the quarters in which each city experienced a positive and statistically significant structural break in its house price growth series, and find that housing booms start first in the Beijing–Tianjin–Hebei region and the Yangtze River Delta region. Further, regression results show that there exist spatial spillover effects both on the extensive margin and intensive margin from the neighboring markets in China, and that the focal city housing market significantly responds to the housing booms in the two economic regions. Controlling market fundamentals does not vary the spillover patterns identified. We conclude that there is a distinctive dynamic spillover process in China that the metropolitan economic regions experience booms first, and then, the booms are transmitted to the geographically adjacent cities.