Author: Ding Ding, Xiaoyu Huang, Tao Jin, and Mr. Waikei R Lam
China’s real estate market rebounded sharply after a temporary slowdown in 2014-2015.
This paper uses city-level data to estimate the range of house price overvaluation across
city-tiers and assesses the main risks of a sharp housing market slowdown. If house prices
rise further beyond “fundamental” levels and the bubble expands to smaller cities, it
would increase the likelihood and costs of a sharp correction, which would weaken
growth, undermine financial stability, reduce local government spending room, and spur
capital outflows. Empirical analysis suggests that the increasing intensity of macroprudential
policies tailored to local conditions is appropriate. The government should
expand its toolkit to include additional macroprudential measures and push forward
reforms to address the fundamental imbalances in the residential housing market.
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