The Fundamentals Of Housing Price Bubble In Shanghai

Shanghai has been the leading housing market in urban China. In the late half of the2000s, the city experienced a pronounced process of housing price appreciation.The study is based on a combination of different fundamentals of housing market:the ratios of price to income and to rent, house mortgage loans, and a comparison of housing market prices with the rational expectation price.The study shows that Shanghai housing market appears to form a bubble since2003, a bubble that gained strength in2009. This finding is supported by the evidence that a peak point emerged almost simultaneously in2009along the trend line of each fundamental indicator. The ratio of price to income and the ratio of price to rent reached the maximum value in2009. Moreover, the deviation of housing prices from the rational expectation price peaked to the maximum51percent in2009and house mortgage loans crested in2008-2009. The peak value of each indicator emerged at least three times from2002to2009. There existed a maximum value for each indicator for the year2009in Shanghai.From the above analysis, the following policy implications are derived. In areas where house prices increase fast, governments should designate the areas as overheated areas, imposing tight resale regulations. Alternative sources of financing for the real estate sector should be encouraged, including development of the real estate investment trust. When free market cannot allocate resources effectively to cover various groups’interests, then government intervention becomes necessary.