Making Sense of Residential Investment in China
Over the past two decades the Chinese housing market experienced rapid growth. Real house and land prices grew at an annual rate of 1.7 and 13.3 percent respectively; the share of residential investment in GDP rose threefold from 2.4 percent in 2002 to 6.7 percent in 2016. I study whether these developments in the Chinese housing market are consistent with a general equilibrium growth model. I introduce a credit constraint on real estate firms and government land sales into a real business cycle model and calibrate to the Chinese economy. I find that the growth rate of residential investment is higher than that along the balanced growth path. This paper considers alternative explanations for the behavior of residential investment in China.