Written By: Congmin Peng
A sharp increase in Chinese house prices combined with the extraordinary lending growth during the 2000 s has led to concerns of an emerging real estate bubble and impairment of consumer financial well-being. This article studies real house prices relative to fundamental house values. Housing constitutes a large fraction of most household portfolios therefore affect household well-being, and its characteristics are in contrast to what prevails in most financial markets as arbitrage is limited, and hence correction toward fundamental values can be a prolonged process. Using a time-varying present value approach, our findings suggest evidence of bubbles in the Chinese housing market nationally and in representative cities using real-term data. We also find that price dynamics have an important role to play in determining house prices. Moreover, the results reveal that the dominant driving force of house price deviations from fundamental values might be the less than fully rational behavior of investors rather than fundamental factors. This seems plausible in an emerging market such as China.