Exuberance and spillovers in housing markets: Evidence from first- and second-tier cities in China

Over the last few decades, exuberance (bubble) and spillovers (ripple effects) have both been observed in the overheated housing market. However, surprisingly few attempts have so far been made to integrate these two concepts to further explore China's housing market frenzies. According to growth poles, the causality between exuberance and spillovers in real estate markets is that capital is initially concentrated in first-tier cities, but the housing-price exuberance then leads to spillovers to second-tier cities. Using housing price and rental data encompassing four first-tier and six second-tier cities on a month-by-month basis, we apply recursive unit root tests to examine the degree and timing of housing booms. At the same time, a rolling-window spillover index is used to evaluate ripple effects among these cities. Our estimates indicate that Beijing as a first-tier city first exhibits episodes of exuberance, which are then transmitted to second-tier cities.