Abstract
AbstractWe investigate what determines China's housing price dynamics using a DSGE‐VAR estimated with priors allowing for the featured operating of normal and “shadow” banks in China, with data observed between 2001 and 2014. We find that the housing demand shock, which is the essential factor for housing price “bubbles” to happen, accounts for near 90% of the housing price fluctuation. We also find that a prosperous housing market could have led to future economic growth, though quantitatively its marginal impact is small. But this also means that, for policy‐makers who wish to stabilize the housing market, the cost on output reduction would be rather limited.
Highlights
The past decade has witnessed the ...rst round of China’s housing market boom, which started in the early 2000s, and yet, has no sign of ceasing, since its full marketisation reform in July 1998, when the abolishment of the ‘welfare-oriented public housing distribution system’ exposed Chinese households to an unprecedented venture in a real marketplace for houses
In this paper we have studied what determines China’s housing price dynamics by establishing a dynamic stochastic general equilibrium (DSGE) model, allowing for the unique feature of the Chinese banking system where ‘shadow banks’ operate in a sub-system a¢ liated to the main system constituted by normal commercial banks, which has never been attempted before
We ...nd that the housing demand shock, which may be interpreted as shocks to preference for houses, explains more than 80% of the housing price
Summary
The past decade has witnessed the ...rst round of China’s housing market boom, which started in the early 2000s, and yet, has no sign of ceasing, since its full marketisation reform in July 1998, when the abolishment of the ‘welfare-oriented public housing distribution system’ exposed Chinese households to an unprecedented venture in a real marketplace for houses. Over the period between 2002 and 2014, commercial residential housing price in China had grown by 184% at national level[1]. The soared housing price in China had become a hot social and economic topic that evoked wide concerns and discussions. Many would agree that the housing market plays a key role in China’s economic growth, and that, to understand what determines its dynamics, boom and bust is of great importance for understanding the Chinese economy. Given the background that the collapse of US housing market ...nally led to the ‘subprime crisis’in 2007 and that the scene of the Japanese ‘lost decades’that followed after the burst of its ‘housing bubble’in the early 1990s remains vivid, many are concerned whether China, the world’s second largest economy, will follow the old road to ruin.
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