High-speed Urbanization and Housing Bubbles

Abstract

With China's high-speed urbanization, the housing demands and housing prices have increased rapidly in major cities. By combining the classical bubble theory with investors’ short-term decisions, we propose a method to simulate bubbles' rising and bursting process in a multi-sector economy. We find that when urbanization goes too fast, the housing price growth rate will exceed the industrial interest rate, causing enterprises to buy houses. Enterprises’ housing investment further increases the expected returns of housing investment, attracting more investment and leads to housing bubbles. The faster the speed of urbanization, the higher the housing price grows, the longer the bubble cycle, and the greater the impact on the economy when bubbles burst. Continued urbanization cannot prevent bubbles from bursting. To ensure economic stability, the pace of urbanization needs to be limited.