This paper investigates the possible relationship between stock prices and property prices in China using data from stock market and real estate market from January 2005 to May 2013. Augmented Dickey-Fuller unit root test and Johansen Cointegration test are adopted to identify long term equilibrium between the time series; Vecor Autoregression models and Granger Causality test are used to detect the relationships between the property market and stock market. Empirical results show that before the 2008 global financial crisis, property market and stock market are positively correlated due to wealth effect and credit-price effect; after the financial crisis, “competing for capital” theory dominates and renders the correlation negative. Based on the case studies on Thailand and other count...[ Read more ]

This paper investigates the possible relationship between stock prices and property prices in China using data from stock market and real estate market from January 2005 to May 2013. Augmented Dickey-Fuller unit root test and Johansen Cointegration test are adopted to identify long term equilibrium between the time series; Vecor Autoregression models and Granger Causality test are used to detect the relationships between the property market and stock market. Empirical results show that before the 2008 global financial crisis, property market and stock market are positively correlated due to wealth effect and credit-price effect; after the financial crisis, “competing for capital” theory dominates and renders the correlation negative. Based on the case studies on Thailand and other countries, concerns about over-supply in Chines real estate market and potential damage from the burst of property bubble is expressed.