Linkage structure of China’s housing market and its risk-defusing capability

Abstract

There have been many recent fears of severe house-price decreases in some provinces in China causing a nationwide collapse of the housing market. Therefore, this paper aims to clarify the linkage structure of China’s housing market and its risk contagion routes. Given monthly data of provincial housing and stock-market capital returns from 2001M01 to 2019M12, on the basis of graph theory, this paper first explores the linkage structure of provincial housing markets. Relying on the linkage structure, this paper then simulates the effect of unexpected negative shocks from the stock market on the probabilities of a housing-market collapse based on the epidemic model. The results show that (i) consistently with practical evidence, the probability of housing-market collapse is relatively high in the southwest of China and (ii) reducing housing-market linkage, such as through a blocking mechanism, to prevent collapse is helpful.