Regime-switching housing price cycle in China

Abstract

This paper aims to examine the house price cycle at the province level of China using the three-regime Markov-switching model. Our findings indicate that, in Xinjiang, Chongqing and Jiangsu, there was no secular slowdown in growth since the rapid-growth regime re-emerged at some stage. While during economic downturn and rapid economic growth, house prices fall and grow fastest, respectively, in the central region. However, during normal growth regime, house prices increase fastest in the eastern provinces. These findings indicate regional heterogeneity in China. We also investigated determinant factors of regime switching in each region. Our results show that output growth and real lending rate are two common factors in the co-movement of smooth probabilities of recession. Therefore, it should be possible to apply a uniform housing policy for the whole country, but only when house prices are in recession. However, in most cases, the government should implement a different policy according to the local conditions and determinant factors of each region.