Real estate bubbles in China : a tale of two cities

As housing markets have overheated recently in urban China, housing price bears substantial risk. The issue of housing price bubbles in these markets has become a popular and significant topic among consumers, policymakers and academia alike. In particular, Guangzhou and Shenzhen, as the most important markets for revealing the condition of the housing market in the Pearl River Delta, have attracted much attention in the period of prosperity. As such, an investigation into the bubble issue in these two cities is conducted by using an improved model, the time-varying risk model. The empirical work reveals that explosive bubbles did periodically (2003 Q1 to 2006 Q2 and 2009 Q2 to 2010 Q1) have an impact on the two markets. For the rest of the period, housing markets in both Guangzhou and Shenzhen are found to be significantly influenced by macro adjustments and various economic events. The implication of the research provides a reference for policymaking in addressing the issue of softening in China’s real estate market.