Time-varying causality in the price-rent relationship: revisiting housing bubble symptoms
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Time‑varying causality in the price‑rent relationship: revisiting housing bubble symptoms Chien‑Fu Chen1 · Shu‑hen Chiang2 Received: 2 March 2020 / Accepted: 28 August 2020 © Springer Nature B.V. 2020
Abstract According to rational bubble theory, housing prices are composed of economic fundamentals such as rent and the bubble component. While it is clear that non-causality between housing prices and rents serves as evidence of housing bubbles, within-city spillovers can be found in the causal relations. In other words, the causality test covers the detection of the housing bubbles or within-city spillovers underlying overheated housing markets. The purpose of this study is to propose a time-varying version of the Granger-causality test introduced by Shi et al. (J Financial Econom 18:158–180, 2020) in order to trace the status of housing markets across four first-tier cities in China. The empirical results indicate that there are various causal relationships, namely, within-city spillovers over time in Shanghai, Guangzhou and Shenzhen, while exuberant behavior with a housing bubble are especially noteworthy in the case of Beijing. Keywords Time-varying causality · Bubble · Housing prices and rents · Spillovers JEL Classifications C12 · C32 · E32 · R31
1 Introduction The global financial crisis of 2008 showed us that financial instability is often associated with swings in housing prices, and so dealing with overheated housing markets lies at the core of all economic questions. A new policy recommendation is referred to as a macroprudential regulation, which vests the central banks with additional powers through the use of many policy toolkits, for example, loan-to-value (LTV) and debt-service-to-income (DSTI) ratios to counter housing bubbles. However, the most difficult work as noted by past studies concerns how to recognize housing bubbles (Blanchard et al. 2010; Crowe et al. 2013; Galati and Moessner 2013; Ambrose et al. 2013). On the other hand, an expansionary monetary policy with Chinese characteristics—for example, a housing registration system * Shu‑hen Chiang [email protected] 1
Department of Economics, National Dong Hwa University, Hualien County, Taiwan (R.O.C.)
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Department of Finance, Chung-Yuan Christian University, No. 200, Chung‑pei Rd., Chung‑li District, Taoyuan City 320, Taiwan (R.O.C.)
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C.-F. Chen, S. Chiang
(HRS) and an urban-based policy—has led to exorbitant housing price increases, especially in four first-tier Chinese cities, namely, Beijing, Shanghai, Guangzhou and Shenzhen. Just as Wu et al. (2012) argued, China’s version of the housing frenzies may be unprecedented and far exceed the scale of the U.S. housing boom during the 1998–2008 period. What is worse, the real estate sector plays an extremely important role in China’s economic development (Glaeser et al. 2017). It follows from what has been said that the identification of a housing bubble cannot be overemphasized and is especially noteworthy in the case of China. This study is therefore exp
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