International Real Estate Review

Abstract

This paper studies the evolution of property values and the connections between shadow banking and property markets in China. We use Pooled Mean Group estimation to analyze Chinese house prices in 65 cities from 2007-2016, define the "fundamentals¨ of housing prices with the Gordon dividend discount model, and use lagged rents, prices, real and nominal interest rates, and shadow banking activity as short term explanatory factors. We find that the cities tend to share long run fundamentals and adjust relatively quickly to deviations from the fundamentals. We do not find bubbles; rather houses are like growth stocks with house prices rapidly chasing growing rents. More importantly, we find that house prices increase more quickly with the availability of shadow banking funds, which have grown rapidly.

Financialization of urban development in China: fantasy, fact or somewhere in between?

“…Some economists have tended to be more sanguine in their assessment of the risks. They argue that the place occupied by the shadow banking sector in China is relatively small, compared at least with the United States (Lai and Van Order 2019). They point out that much shadow banking is the consequence of a tightly regulated banking sector, but nevertheless is actually controlled by banks, in that banks are behind the issuing of bonds via shadow banking routes (Elliott, Kroeber, and Yu 2015).…”