Chinese Property Markets

The theme of the joint conference between the Reserve Bank of Australia and the Bank for International Settlements in 2012 was ‘Property Markets and Financial Stability’. The conference brought together senior central bankers and leading academics to discuss important policy issues concerning property markets and financial stability. Discussions focused on several important topics, including measurement issues in property prices, housing finance, the effects of macroprudential policies, the management of banks’ risks and securitisation.

Previous research on the United States and Japan finds economically large impacts of changing real estate collateral value on firm investment that amplified the business cycles of those countries. Working with unique data on land values in 35 major Chinese markets and a panel of firms outside the real estate industry, we estimate investment equations that yield no evidence of a collateral channel effect. Further analysis indicates that China’s debt is not characterized by the frictions that give rise to collateral channel effects elsewhere. Essentially, financially constrained borrowers appear able credibly to commit to repay debt in China. While there is no impact on investment via the collateral channel, our results should not be interpreted as implying there will be no negative fallout from a potential real estate bust on the Chinese economy. There likely would be, but through different channels.

Real estate is an important driver of the Chinese economy, which itself is vital for global growth. However, data limitations make it challenging to evaluate competing claims about the state of Chinese housing markets This paper brings new data and analysis to the study of supply and demand conditions in nearly three dozen major cities. We first document the most accurate measures of land values, construction costs, and overall house prices. We then create and investigate a number of supply and demand metrics to see if price growth reasonably can be interpreted as reflecting local market fundamentals.