A Measure of China's Housing Price Bubble from the Perspective of Dynamic House-price-to-income Ratio

Abstract

The objective of this study is to improve the current model for determining the upper limit of the static price-to-income ratio by considering multiple elements that impact the growth of residents' income throughout the duration of their mortgage. The technique being offered presents a model that incorporates a dynamic house-price-to-income ratio. The underlying principle of this concept is derived from the theoretical framework of the equitable maximum correlation between property prices and income. The range of the measured dynamic ratio between house prices and income spans from 2.0755 to 4.3662. The calculation of this ratio should be based on the average interest rate of loans for commercial real estate, the ratio of mortgage repayment to income, and the average rate of growth in per capita disposable income for Chinese banks. The study employed the dynamic house-price-to-income ratio approach to calculate the dynamic house-price-to-income ratio for 31 provinces in China. This was done by considering the provinces with the lowest per capita living area and those with a moderately livable area. The findings of the comparison demonstrate that, once the essential criteria for a reasonably adequate per capita living area are met, the housing prices in all provinces, with the exception of Inner Mongolia, Shandong, and Hunan, exceed the acceptable threshold of the dynamic ratio between income and house prices.