Housing Markets in China and Policy Implications: Comovement or Ripple Effect

• Published date: 01 November 2014
• Author: Shu‐hen Chiang
• DOI: http://doi.org/10.1111/cwe.12094
• Date: 01 November 2014

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China &World Economy / 103–120,Vol. 22, No. 6,2014

©2014Institute of WorldEconomics andPolitics,ChineseAcademyofSocialSciences

HousingMarketsinChinaandPolicyImplications:

ComovementorRippleEffect

Shu-henChiang *

Abstract

TheoverheatedhousingmarkethasrecentlybecomeatoppriorityoftheChineseauthorities

and whether theripple effect exists iskey to understanding this housingissue. Thepresent

paper usesacointegration estimation techniqueforsix first-tier Chinese cities duringthe

2003–2013 periodto showthat thecomovementsamong housing pricesin Chinaare fully

reflected inalong-run equilibrium. Using the Toda–Yamamoto causality test, the ripple

effectisfoundtobecharacterizedbyalead–lagrelationship.Moreimportantly,itisfound

thatBeijingisthemainsourceof housingprice appreciationinChina,andshouldbe

targetedastheregulatoryobjecttoefficientlyresolvethetroublesinthisincreasinglyhigh

housing-priceera.

Key words: causalitytest,housing prices,long-runequilibrium, rippleeffect

JELcodes:O18,R30,R58

I.Introduction

Theconceptof “Thereisland,thereiswealth”isdeeplyrootedinChineseminds.Coinciding

withalackof diversified investmentinstruments,spendingonhousing in Chinahasgrown

evenmorerapidlythaneconomic growthsincethe late 1990s,onthe back of a seriesof

housingprivatizationreforms(Chen etal.,2011b).Evenwiththeemergenceofthesubprime

mortgagecrisis intheUSAand thesubsequentglobal financialcrisis,housingprices in

Chinese citiescontinuedto increasesharplyand repeatedlyhitnewhighs.According to

Wu etal.(2012), China isexperiencing much greater housingprice appreciation than that

*Shu-henChiang, AssociateProfessor,DepartmentofFinance,Chung-YuanChristianUniversity,Chug-li,

Taiwan.Email: shchiang@cycu.edu.tw.TheauthorisindebtedtoShang-hsienChiang,hisfatherandthe

restofhisfamilyforinspiringhisresearch.TheauthoralsowishestothankPei-shanChienforher

assistance.Finally, financialsupportwas providedforthisstudyby the Ministryof ScienceandTechnology

inTaiwan(NSC102-2410-H-033-030-MY2).

104 Chiang Shu-hen/103–120,Vol. 22,No. 6, 2014

©2014Institute of WorldEconomics andPolitics,ChineseAcademyofSocialSciences

experiencedduringtheUS housing boom from1995 to 2006.Therefore, China ’s housing

issue has receivedmuch domesticandglobal attentioninrecent research.

What is the “rippleeffect”?Paststudies have often failed to provideaclear definition

of the rippleeffect.Toclarifythe conceptof the ripple effect, we refer to a similar term,

“comovement,”which is widely applied insocial science. Comovement can be classified

into two types: lead–lag and contemporaneous relationships. Therippleeffect, occurring

inalead–lagmanner, begins with thespilloverofhousingpricesinaspecific region to

otherregionsanditeventuallyleads tocomovementamonglocalhousingpricesin the

long run. Becausetheexistenceofthe rippleeffect maybecriticaltohousingpolicy in

China, itis important toconsiderwhether regional housing price diffusion isoccurring in

China.If theripple effect exists inChina, wemay beableto identify the origin oflocal

housingprice appreciationandcontrol thereal estatemarket in the source region,rather

than thatof allcities orregions. Thismethod, of applying “the rightcure forthe disease,”

couldimprovetheefficiencyofcurrenthousingpricepolicies.Incontrast,ifpure

(contemporaneous)comovementsamonglocalhousingmarketsaredetermined,

macroeconomic controlof housingmarketsisjustified.

Asmentionedabove,followingtwostepsweexaminesixfirst-tiercitieslocatedindifferent

regionstostudyauniqueChinesehousingphenomenon.First,wesetupavectorerror

correctionmodel(VECM) andfind one long-run equilibriumrelationship, whichis totally

manifest in the mannerof the comovements among these cities. Second,the outcome of the

Toda–Yamamoto causalitytest reveals that Beijing,China’s center of politicalpower, is the

mainsource ofhousing pricediffusion;similarresultsarefoundfrom innovationaccounting.

ThereisevidenceinplentytoprovetheexistenceoftherippleeffectinChina ’shousing

markets,andourresultsleadustomakecertainpolicysuggestions:forinstance,theauthorities

should place specialemphasison how best to control housing prices inBeijing.

Theremainderofthispaperisorganizedasfollows.SectionIIreviewsresearchon

housingprice diffusionand ripple effects. SectionIIIoutlinesthedynamic frameworkof a

regionalhousingpricediffusion modelandaneconometricmethod.InSectionIV,thehousing

price data forsixmega cities inChina aredescribedandunitroottests areapplied. Section V

first develops acointegration estimation technique to detect theinteraction among these six

citiesinthelong run andthen usestheToda–Yamamotocausalitytesttosearchforthe origin

ofhousingpricefluctuations. Therelevant economic implications are discussed.

II.LiteratureReview

Overthepastfewdecades,aconsiderablenumberofstudieshavebeenpublishedon