Has the Chinese Housing Boom Truly Impacted the U.S. Stock Market? Investigating the Potential Relationship Between China's Housing Price Dynamics and the U.S. Stock Market

Lippman 101

In this paper, we review the effect that the boom of China's housing prices has had on the U.S. stock market and the potential connection between the two markets. Looking at it more in-depth, the U.S. stock market focus is on the S&P 500 and the eleven sectors of the stock market (Industrial, Healthcare, Real Estate, Utilities, Materials, Industrials, Information Technology, Financials, Consumer Discretionary, Consumer Staples, and Communication Services) while the housing prices are dictated by the residential housing price index within China. Given the relatively recent disaster in September 2021 regarding the Evergrande Group and their potential for failure, the connection between the two markets has come more into focus now than in recent history. The Evergrande Group crisis combined with the housing boom has potentially created a bubble primed to burst and has set the stage for a collapse. Using data from April 2005 to October 2021 and running OLS regressions, I conclude that there should be a significant linear positive relationship between the housing prices of China and the U.S. stock market. If this turns out to be a positive relationship, investors should be wary of the potential effects the housing market would have on their portfolio if it were to continue to boom or abruptly burst.