Evidence of a Housing Bubble in Beijing

Abstract

The price of residential housing in Beijing has increased at an annual nominal rate of 20 percent for the past decade. This rapid growth has happened in a period of rapid urbanization where rural people have moved to cities and towns and there is a rapid and sustained growth in per capita income. This paper reports on the findings from a purpose-designed survey administered to a total of 420 households in 16 districts in Beijing on the determinants of house prices. Our analysis reveals that housing prices in Beijing have deviated above the norms in terms of expectation and affordability. Economic fundamentals in the form of income growth and low interest rates on home-loans are able to explain just 12 percent of the inflation in house prices. The remainder is due to speculation which is another reason for the bubble in house prices. Policies, in the form of interest rate hikes, reduced loans to purchase second and third homes, and limits on the purchase of additional homes have been introduced to slow the growth of the bubble. Respondents to the survey doubt the effectiveness of these policies in slowing the growth of price bubble, both in the short and the long term.

DOI: 10.5901/ajis.2013.v2n8p627