The Great Housing Boom of China

Tuesday, October 13, 2015
china housing boom

China’s housing market has seen spectacular growth over the past several years, with house prices growing at an annual rate of 17 percent. But some of the country’s fundamentals would suggest that such a boom should not be continuing. A 2014 working paper (which was revised in September) attempted to uncover how such a boom has been possible.

In their working paper “The Great Housing Boom of China,” Yi Wen, an economist with the Federal Reserve Bank of St. Louis, and Kaiji Chen, an assistant professor at Emory University, examined the circumstances surrounding the rise in house prices. The characteristics of this boom seem to suggest a paradox:

  • According to data based on 35 major Chinese cities, average real house prices grew at an annual rate of around 17 percent for the past decade, while average income growth was 11 percent. GDP averaged 10 percent growth over the same period.
  • In 2013, the national urban housing vacancy rate was 22.4 percent. For comparison, the U.S. homeowner vacancy rate during the peak of the housing bubble in 2006 was about 3 percent.
  • Between 1998 and 2012, China’s real rate of return to capital was around or above 20 percent.

As Wen and Chen noted, “The combination of these features … is puzzling.” They also noted that traditional models would not explain all these characteristics being present at the same time.

In this paper, Wen and Chen proposed a theory to explain the great housing boom. The authors explained that a key element of their theory is that flourishing firms may seek housing as an alternative store of value for their rapidly growing wealth if they expect the high capital returns they’ve enjoyed to eventually subside. As the authors wrote, “[S]uch speculative investment behavior can create a self-fulfilling housing bubble that grows much faster than the national income during an economic transition, thus explaining China’s massive ‘ghost apartment’ phenomenon and decade-long faster-than-income growth in housing prices despite high capital returns.”

They concluded, “Our theory suggests that China’s unprecedented income growth is not the full story behind the great housing boom. The decade-long housing boom contains a rational bubble arising naturally from China’s economic transition, which is featured by labor reallocation from the traditional low-productivity sector to the newly emerging high-productivity sector. … The model’s predictions are thus consistent (quantitatively and qualitatively) not only with China’s broad pattern of economic growth, but also with the three paradoxical features of the great housing boom.”

Additional Resources

Posted In Housing  |  Tagged yi wenchinahousing
Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted. We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:
  • Vulgar, obscene, profane or otherwise disrespectful or discourteous
  • For commercial use, including spam
  • Threatening, harassing or constituting personal attacks
  • Violating copyright or otherwise infringing on third-party rights
  • Off-topic or significantly political
The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters, so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may have in any comment you submit.
comments powered by Disqus

The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.

Subscribe to
On the Economy

Get notified when new content is available on our On the Economy blog.

Email Alerts  |  RSS

About the Blog

The St. Louis Fed On the Economy blog features relevant commentary, analysis, research and data from our economists and other St. Louis Fed experts.

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

Contact Us

For media-related questions, email For all other blog-related questions or comments, email