Estimation of bubble dynamics in the Chinese real estate market: a State space model

This paper analyses the existence of a bubble in the Chinese real estate market and examines its driving factors with a state-space model. The model considers macroeconomic and real estate time series variables as inputs and employs a Kalman filter to obtain an estimated fundamental price using demand and supply for Chinese real estate. We then measure the deviation between actual and estimated fundamental real estate prices to test for the existence of a bubble. We find evidence for the existence of a bubble especially post 2010, when the deviation ratio is found to be significantly higher with a peak of 80% in 2012. Our estimation of overvaluation is generally much higher than in other studies.