Asymmetric Fluctuating Behavior of China's Housing Prices

• DOI: http://doi.org/10.1111/cwe.12153
• Author: I‐Chun Tsai,Wen‐Yuan Lin
• Date: 01 March 2016
• Published date: 01 March 2016

107

China & World Economy / 107–126, Vol. 24, No. 2, 2016

©2016 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Asymmetric Fluctuating Behavior

of China’s Housing Prices

Wen-Yuan Lin, I-Chun Tsai*

Abstract

The present study explains the reasons for the imbalanced development of the Chinese

housing market. Using the quantile autoregression unit-root test, we examine housing

prices in China’s five major cities. The results show that the rising and falling of housing

prices in these cities exhibits asymmetric reversion. When housing prices fall, market capital

is highly sensitive to housing prices, and housing prices resist the pressure to fall further.

However, when housing prices rise, the housing market becomes imbalanced, with housing

prices tending to overreact in an upturn. The results of this study indicate that when housing

prices rise irrationally, the government should intervene in the housing market promptly to

prevent housing bubbles.

Key words: Chinese housing market, housing bubble, housing price behavior, persistent

housing rewards, quantile autoregression unit-root test

JEL codes: R10, R31

I. Introduction

Housing prices in Japan began to rise drastically from 1985 before slumping abruptly in

1991. The housing bubble and housing-market crash have continued to negatively affect

Japan’s economy in the decades since, and the housing market imbalances in Japan have

attracted the attention of governments and scholars worldwide. Housing bubbles persist

in various countries,1 and it was a housing bubble that caused the US housing market

*Wen-Yuan Lin, Assistant Professor, Department of Finance, Beijing Normal University, Zhuhai, China.

Email: linwy@bnuz.edu.cn; I-Chun Tsai (corresponding author), Professor, Department of Finance,

National University of Kaohsiung, Taiwan, China. Email: ictsai@nuk.edu.tw.

1Fern

á

ndez-Kranz and Hon (2006) show that house prices in Spain rose from 1998 to 2003, resulting in

a housing bubble. Roche (2001) determines that a speculative bubble of house prices occurred in Dublin.

Richmond (2007) indicates the existence of a housing bubble in the UK before 2006. Numerous studies

have identified a bubble phenomenon in the US housing market (e.g. Goodman and Thibodeau, 2008;

Clark and Coggin, 2011; Kivedal, 2013; Brauers et al., 2014).

108 Wen-Yuan Lin, I-Chun Tsai / 107–126, Vol. 24, No. 2, 2016

©2016 Institute of World Economics and Politics, Chinese Academy of Social Sciences

turmoil (i.e. the 2007 subprime mortgage crisis), which affected economies across the globe.

To prevent an economic depression following the housing bubble collapse, the US Federal

Reserve and the European Central Bank successively adopted monetary policy of quantitative

easing. Nevertheless, the capital from quantitative easing of these developed economies

entered emerging markets, resulting in stock market and housing market bubbles in these

emerging markets.

Since 2011, the International Monetary Fund has repeatedly warned China that a

housing bubble could occur because of the hot money flows under the quantitative easing

monetary policy. Many studies have provided evidence of housing bubbles in China. For

example, Hui and Yue (2006) determine that a housing bubble occurred in Shanghai in 2003,

but not in Beijing. Hui and Gu (2009) show that a housing market bubble occurred in

Guangzhou in 2007. Hou (2010) discusses the presence of a housing bubble in Shanghai

from 2003 to 2004 and in Beijing from 2005 to 2008. Dreger and Zhang (2013), who surveyed

35 cities in China, found severe housing bubbles in the south-east coastal areas and

special economic zones. Examining the data on housing prices in China from 2002 to 2008,

Wang and Zhang (2014) assert that basic housing price levels had been overestimated in

several cities. Using data collected from 28 provinces in China between 2000 and 2012, Shih

et al. (2014) find that problems related to housing bubbles and housing affordability

worsened in areas surrounding Beijing and Shanghai during this period.

Why have housing bubbles continued to occur in several countries in the years

following the 2007 subprime mortgage crisis? The Chinese Government has continued to

demonstrate its concern about the boom of the housing market, implementing policies to

control housing demand and speculative capital flows, such as restricting or reducing

lending. In 2005, the Chinese Government announced a regulatory policy to stabilize house

prices. Related to interest rates and business taxes, the policy substantially reduced housing

development and investment, trading volume and price increases for the entire year. In

2006, the Chinese Government announced six measures to influence house prices, including

the 90/70 policy,2 home mortgage payment ratios (

≥

30% of a house price) and a sales tax

exemption period extending from 2 to 5 years. In 2010, house prices in Beijing, Shanghai and

Shenzhen continued to rise dramatically. Therefore, on 15 April 2010, the Chinese

Government announced a regulatory policy (i.e. no mortgages could be granted for a fourth

house) to suppress the growth in house prices. However, despite these efforts, the housing

market imbalance remained. Therefore, the present study examines housing price variations

in five major cities in China to determine why housing bubbles occurred so easily and to

2The units that are less than 90 m2 should account for more than 70 percent of the new residential housing.