Housing price
bubbles
17
International Journal of Housing
Markets and Analysis
Vol. 3 No. 1, 2010
pp. 17-37
# Emerald Group Publishing Limited
1753-8270
DOI 10.1108/17538271011027050
Received 7 April 2009
Revised 2 July 2009
Accepted 31 August 2009
Housing price bubbles in Beijing
and Shanghai?
A multi-indicator analysis
Yongzhou Hou
Royal Institute of Technology, Beijing Normal University, Beijing, China
Abstract
Purpose – Beijing and Shanghai have been the leading housing markets in urban China. In the late
half of the 2000s, both metropolises experienced a pronounced process of housing price appreciation.
The purpose of this paper is to examine whether there exist housing price bubbles in the two largest
cities in China.
Design/methodology/approach – The study is based on a combination of different quantitative
indicators: a comparison of housing market prices with the rational expectation price, mortgage
loans, and the ratios of price to income and to rent. Moreover, the statistical tool of control chart is
introduced to quantify housing bubbles.
Findings – The study shows that Beijing appears to have been on the way of forming a housing
price bubble between 2005 and 2008, and that there perhaps existed a housing bubble in Shanghai
from 2003 to 2004. It appears that the housing market cycle in Beijing may be divided into three
stages: the cycle peak stage (1991-1997), the cycle trough stage (1998-2003) and the second cycle peak
stage (2004-2008).
Originality/value – In an attempt to explain the possible existence of housing bubbles in Beijing
and Shanghai, this paper uses an integrated strategy involved with such fundamentals as interest
rates, rent, income and GDP. In particular, the control chart, based on per capita GDP, is introduced to
identify a housing bubble.
Keywords Housing, Prices, China, Financial analysis
Paper type Research paper
1. Introduction
Real estate has become a major industry in the Chinese economy from the late 1990s.
Increasingly more households have begun to purchase housing and the sector has
contributed a great deal to expanding the domestic demand after the 1997 Asian crisis.
During the period 2005-2007, many cities in China, especially such metropolitan areas
as Beijing and Shanghai, had experienced a dramatic run-up in housing prices.
However, once the housing price deviates too much from its fundamental value, it may
give rise to problems and even financial crisis. This article will discuss whether there
exist housing bubbles in Beijing and Shanghai by incorporating the examination of
macro-economic indicators with micro measures.
The specific characteristics of housing have made it a first interest for researchers
interested in asset price bubbles. Housing is not only a durable good with a long life,
but also an immovable estate. The durability and spatial fixity of housing require
an exclusive treatment of short-run supply inelasticity. Since land supply is hard to
increase in a given period, the supply elasticity of land is the least among such
elements as capital, labour and land. For this reason, the elasticity of housing supply is
much less than other common goods, while this does not mean that it is always hard to
raise housing supply.
The elasticity of housing supply are much less in Beijing and Shanghai than that in
other cities, since demand shocks such as income and household formations are more
significant and the land for development is comparatively rather limited in the two
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