What drives housing dynamics in China? a sign restrictions VAR approach

We study housing dynamics in China using vector autoregressions identified with theoryconsistent sign restrictions. We study five potential drivers: 1) Population increases; 2) a relaxation of credit standards, for example, due to the shadow banking system; 3) increasing preferences towards housing, for example, due to a housing bubble or housing being a status asset to be competitive in the marriage market; 4) an increase in the savings rate; and 5) expected productivity progress. Our results show that fundamental shocks (population, credit and productivity) play a major role in the dynamics of house prices and residential investment before 2009. Preference shocks seem especially relevant in the last several years, and when the estimation uses price indices not coming from China’s National Bureau of Statistics.