Content introduction：

No. E2019008

China's Housing Bubble, Infrastructure Investment, and Economic Growth

Shenzhe Jiang, Jianjun Miao, and Yuzhe Zhang

October 26, 2019

 

Abstract:

China's housing prices have been growing rapidly over the past decades, despite the low rents growth. We study the impact of housing bubbles on China's real economy, through the channel that local governments use land-sale revenues to fuel infrastructure investment. We calibrate our model to the Chinese data over the period 2003-2013 and find that our calibrated model can match the declining capital return and GDP growth, the average housing price growth, and the rising infrastructure to GDP ratio in the data. We conduct two counterfactual experiments. If the bubble bursts in 2025, then on impact the GDP growth rate falls to 2.6% due to the hit to the housing sector, but GDP in the long run exceeds that with the bubble because of the reallocation of capital and labor to the nonhousing sector. If the bubble remains, however, implementing a property tax and using the tax revenue to finance infrastructure investment will reduce the housing price and increase long-run GDP.

 

Keywords: 

Housing Bubble, Infrastructure, Economic Growth, Chinese Economy, Property Tax.

 

JEL codes: O11, O16, O18, P24, R21, R31.

 

 

The series of New Structural Economics Working Papers aims to encourage academic scholars and students from all over the world to conduct academic research in the field of new structural economics. Excellent papers are selected irregularly and are offered academic suggestions and recommendation, but the published working papers are not intended to represent official communication from INSE.

The Present Paper was approved by the NSE A0 Growth Group.