Measuring Bubble Levels in China’s Urban Housing Market

LV Jianglin

School of Finance and Statistics, Jiangxi University of Finance and Economics

Abstract:

In this paper we demonstrate that price-to-income ratio (PIR) is the most precise indicator of measuring bubble levels in China’s urban housing market under current conditions. We have built a model to measure the reasonable PIR ceiling. Based on current mortgage rates, loan terms and down payment ratios, we conclude that the reasonable PIR for China’s urban residents should lie between 4.38-6.78 and should not exceed 7. Then, using statistical data, we calculate current PIR in China’s major cities. With reference to proper PIR, we conclude the existence of bubbles in China’s urban housing market; in particular, bubbles have grown enormously large in some first-tier cities, which pose a huge financial risk. Based on the above analysis, we propose some policy suggestions to carefully deflate the bubbles in these housing markets.

Key Words:

housing market, bubble, price-to-income ratio (PIR)

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