Since the implementation of the reforms and opens to the outside world for 3 decades, China has been a country with an important influence in the world, whose unbelievably fast development is concerned by more and more other countries. Nevertheless, with the too rapid development of economy in China, some problems appear in the macro economy as a result of the system, management and other aspects. One of them is the problem of real estate market.

In 1998, Chinese government went in for innovations of real estate market. Since then, the Chinese real estate market has developed rapidly. And now it becomes a significant pillar industry and plays an increasingly important role in the development of economy. However, it appears abnormality simultaneously as well. Because of limitation and rareness of land resource, great public demand caused by quite large amount of population and relative stability compared with other financial assets, house prices continue to show an upward tendency. Especially during recent years, house prices in China increase extremely so fast that it seems not consistent with the development of Chinese economy——house prices in some cities are almost as high as those cities of developed countries, while people’s average income is much lower. As we see that the reason of the financial crisis from 2007 until now is related to the collapse of real estate bubbles in US, this unusual phenomenon in China is more controversial because it has the possibility to cause another economic crisis. Thus, the issue about the housing bubbles in China becomes quite popular around the world. Therefore, I want to explore into this issue to test whether the housing bubbles really exist in Chinese real estate market by using some appropriate models and tests in the dissertation.

The plan of my dissertation is as follows. First, I review some prior related fields’ studies that conducted before and conclude that index tests, present value model, unit root and cointegration tests should be chosen to use to test whether there are housing bubbles in the real estate market of China. Whereafter, I will state the reasonability and deficiency of those chosen models and methods and describe the specific models and approaches for the housing bubble tests. After that, I will collect the relative available statistic data about real estate market of China, monthly house prices index, monthly house rents index and mortgage rates of China, since 2003 till now. Then make some necessary process to those data sets and compare them to reveal the abnormal growth of the house prices. And the following step is to calculate and do the tests by using Eviews and report the results, which is that it does (not) exist housing bubbles in the real estate market in China. At last, I will analyze the results, discuss the main reasons behind and offer some suggestions to improve the danger situation of Chinese real estate market.

Literature Review 900

From the definition of Wikipedia, a real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements, followed by a reduction in price levels. [1]

Simply, housing bubbles are characterized by an exaggerated discrepancy between house prices and other fundamentals. As the definitions of fundamentals, financial series should be stationary. So by testing the explosion of house prices, a large amount of studies analyze the potential occurrence and existence of the real estate bubbles.

To test the real estate bubbles, one popular approach is the index tests. Gallin (2004) studied the relationship between house prices and rents. Through the model of house prices and rents, he assumes that in a frictionless market, prices should be high relative to rents when, among other things, interest rates are low and expected capital gains are high. [2] Thus in his paper, he addresses that the indicator of rent-price ratio should be stationary and discusses its predictive power to the changes on prices and rents. As a result, he concludes that even if the rent-price ratio could be considered as a measure of valuation to assess whether house prices are relatively too high and how house prices and rents would move in real estate market, it is not a precise indicator because price movements are hard to predict.

In the other hand, Himmelberg, Mayer, and Sinai (2005) thought that accelerating house price growth and outsized price increases in certain markets are not intrinsically signs of a bubble.[3] They also apply the formula of house prices and rents, and introduce another similar index, price-to-income. Moreover, they highlight the influence of user costs on the price-to-rent ratio and price-to-income ratio. They believe that comparing rental costs or income levels with house prices is not so convincing without calculating the cost of owning a house. That is, conventional indices such as price-rent and price-income ratios are probably misleading in a test for bubble occurrence.

Therefore, though index test is commonly used,