A Tale of Two Countries: Comparing the US and Chinese Housing Markets
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A Tale of Two Countries: Comparing the US and Chinese Housing Markets Rose Neng Lai 1 & Robert A. Van Order 2 # Springer Science+Business Media, LLC, part of Springer Nature 2018
Abstract The recent surge in property values in China has been similar to the surge in the U.S before the crash in 2007. This raises concerns about whether China is destined to have a crash as well. We estimate similar models of property values for the two countries, in order to compare price dynamics side by side. We find little in common between them. In the U.S. the adjustment process appears prone to Bbubbles^ in the sense of strong momentum, but Chinese prices have been generally mean reverting, without momentum. This suggests that the recent price rise in China has had more to do with scarcity than with irrational exuberance. Keywords Chinese housing market . US housing market . Bubbles . Momentum . (Pooled)
mean group estimation
Introduction This paper compares the recent evolution of property values in the United States and China, both because they are the two largest economies and because they have had periods of similarly sharp increases in house prices, earlier in the U.S. and later in China. In the case of the U.S., a strong increase until around 2006, something like a bubble, was then followed by a sharp decline. A major question in this paper is whether or not China today is like the U.S. in 2006, and therefore could learn from the U.S. experience. We estimate similar models for the two countries, across cities and time, to compare their long run trends and, more importantly, their short run dynamics. Because
* Rose Neng Lai [email protected] Robert A. Van Order [email protected]
1
Department of Finance and Business Economics, University of Macau, Taipa, Macau, China
2
George Washington University, Washington, D.C., USA
R.N. Lai and R. Van Order
the time period allowed for our analysis is short, we view the results as essentially descriptive, albeit applied to important time periods. The Great Recession, which began at the end of 2007, was triggered by the bursting of the U.S. housing bubble, which had been building up from around 2000 until about 2006. During that period the securitized mortgage market, particularly the Bprivate label^ market,1 experienced an unprecedented boom, which, however, collapsed once the housing market collapsed, followed by collapses of many of the financial structures and institutions that held the securities. The housing market has largely recovered over the past decade; although price fluctuations have varied widely across cities. The private label market has mostly not recovered. On the other side of the globe, China, as the second largest economy, has experienced rapidly-increasing house prices since 2009, in a way that looks somewhat like the U.S. housing market up to 2006. As a result, BBubble^ has been used to describe the Chinese housing market. The longer it takes for the seeming housing bubble in China to burst, the more concern there is over implications of a burst. After decades of
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