In a similar way to the stock market, the housing market in China has often been portrayed as highly speculative, giving rise to “bubble” concerns. Over the last decade, residential prices increased every year on average by double digits in Beijing or Shanghai (Deng, Gyourko and Wu, 2012). However many observers and researchers argue that the fundamentals of the housing sector, both sector-specific and macroeconomic, may have been the driving force behind housing price volatility. While existing empirical work exclusively relies on downward-biased official housing prices, this paper uses original high-frequency unit level residential price series for Beijing and Shanghai to test alternative hypotheses about the drivers of house price growth. We propose a sequential research strategy including the construction of hedonic prices, explosive unit root tests (Phillips, Shi and Yu, 2014), the filtering of microstructure noise (Bollerslev et al. 2015) and a Mixed Data Sampling (MIDAS) methodology (Ghysels et al, 2007; Engle et al., 2013) which enables us to document that fundamentals can indeed account for movements in housing price volatility, as well as transaction volume in first‐tier cities such as Beijing and Shanghai.

The housing market in China has often been portrayed as highly speculative, giving rise to “bubble” concerns. Figure 1 shows a dramatic increase in discussion about “housing bubbles” in the Chinese media, based on a Google search. The search covers the period from 2005Q1 to 2013Q4, starting before the global financial crisis and ending with a recent housing market boom triggered by the huge monetary-fiscal reflation programme in China in 2009. Indeed the sharp rise in real estate prices in China has been similar to that experienced in the United States during the subprime decade (Deng, Gyourko and Wu, 2012; and Wu, Gyourko and Deng, 2012). For example, over the last decade, residential land prices increased on average by approximately 25% per annum in Beijing. A similar pattern of residential market volatility has been observed in other major housing markets, such as Shanghai and Hangzhou (see Deng, Gyourko, and Wu, 2012).

There is a presumption that such accelerated rises in prices are generated by a bubble. However, some observers and researchers argue that fundamentals in the housing sector, both sector-specific and macroeconomic, may have been the driving force behind housing price volatility (see, for example, Fu, Qian and Yeung, 2013). This paper tests these alternative hypotheses on original high-frequency hedonic residential housing data, which avoid the bias in official housing prices data. We find no statistical evidence that a bubble was driving the rise of real estate prices in China in the second half of the first decade of the new millennium. Rather price volatility seems to be well-explained by movements in classical fundamentals.