Despite being the biggest contributor to world growth, China’s economy has been causing worries at home and abroad for the past few years. First, China’s maturing economy experienced decelerated growth. Then, tumbling stock markets sent ripples throughout international markets. Now, China’s housing market is unnerving economists and analysts.

Housing prices skyrocketed between 2015 and 2016 in essentially all cities. In metropolitan areas like Beijing and Shanghai, there was a 25 percent increase in housing prices, and in Shenzhen, some property prices rose as much as 50 percent.

High prices made housing unaffordable for many. In highly developed cities, expensive housing has also resulted in a loss of talent, as many young skilled professionals sought employment in less-expensive cities and foreign countries. In fact, in 2013, the government of Shenzhen reported that Shenzhen companies, which include large technology companies like Tencent, lost 20 percent of their workforce due to expensive housing.

Urbanization has been one of China’s long-term strategies for economic development. Yet, the high living costs of cities have been prohibitive for many, especially low-income workers. Businesses have responded to the shrinking labor pool by raising wages, which has consequently increased labor costs. Higher labor costs have been one of the recent factors that reduced China’s competitiveness in labor-intensive industries.

Additionally, the ballooning housing market will likely have a damaging effect on China’s consumption. Between 2015 and 2016, loose financial regulations enabled people to easily obtain housing loans. As a result, many buyers incurred large amounts of debt. According to China’s central bank, housing loans increased by 2.3 trillion RMB ($335 billion) during the first two quarters of 2016, representing a 109 percent increase over that from the same period in 2015. Additionally, according to the Federal Reserve Bank of St. Louis, housing prices in China have been rising nearly twice as fast as disposable incomes.

Without remarkable wage increases, people must cut the consumption of other goods in order to pay off housing costs. The dramatic increase in housing prices would likely reduce future consumption and obstruct the government’s long-term strategy of making the Chinese economy more consumption-based.

Moreover, the rapid increase in housing prices has enabled many speculators to make significant profits, thus making real estate investment extremely lucrative. This has caused many firms, both private and public, to divert attention from their main business operations to engage in speculation. For example, Hirisun Technology originally expected a net loss of 20 million RMB for the 2016 fiscal year, but after selling an office in central Beijing, made a profit of 1 million RMB. Putian Telecommunication, Tianhe Defense Technology and Guangdong Daily Media are all expecting to become more financially stable by selling some of their real estate holdings.

The increase in housing prices has raised the opportunity cost of operating a business, resulting in a shift towards speculative activities. Although it is still too early to tell, a sustained shift from entrepreneurial and R&D activities towards speculation could reduce innovation and therefore stunt long-run economic growth.

Finally, rising housing prices have spurred widespread concern of a housing bubble for the past couple years. Many households in China save large portions of their wealth in housing and land, more so than any other asset class. Additionally, China’s real estate and construction sectors constituted approximately a fifth of GDP growth last year. Given that housing and land tend to be highly leveraged, a debt bubble can endanger China’s financial system and economy.

Yet, there are conflicting opinions on whether China’s real estate market is actually in a bubble. Researchers at the National Bureau of Economic Research (NBER) found that, in most cities, rising prices are being driven by rising incomes rather than irrational expectations.

“Mortgage loans were protected by down payments commonly in excess of 35 percent,” the NBER authors said. “The housing market is unlikely to trigger an imminent financial crisis in China, even though it may crash with a sudden stop in the Chinese economy.”

However, according to researchers at the Federal Reserve Bank of St. Louis, a bubble is emerging due to high capital returns that are “not sustainable in the long run.”

“Our theory suggests that China’s unprecedented income growth is not the full story behind the housing boom,” Federal Reserve Bank researchers Kaiji Chen and Yi Wen said.

The real and potential consequences of expensive housing naturally lead one to ask: Why are housing prices in China so much higher and what can be done?

Although a handful of factors contributed to rising housing prices, it is ultimately the product of a shortage in supply coupled with a boom in demand.

Weiying Zhang, a prominent Chinese economist, points out that Chinese local governments have a vested interest in raising real estate prices. According to the Shanghai Real Estate Research Institute, revenue from transferring and selling land use rights to private real estate developers accounted for 36.4 percent of the total 2014 revenue of local governments, not including government taxes on real estate development and transaction. Since all natural resources, including land, belong to the national government, local governments stand to earn a substantial profit when they turn the land over to real estate developers.

Thus, local governments experience an increase in their “wealth” when the real estate market is strong, and to that end, they have a strong interest in maintaining high housing prices. Local governments control the real estate market by directing the rate at which undeveloped land is handed over to private real estate developers. At present, this rate is relatively slow, so we observe that the supply of land and hence availability of new houses are very limited when compared to the demand exerted by China’s huge population.

While the supply of houses has grown only modestly, demand has expanded significantly. The high demand for houses is a result of both structural and short-term problems.

While the size of the Chinese middle class and its savings have increased, investment options in mainland China remain rather limited due to the restrictions the Chinese government has imposed on capital flow. The underdeveloped financial services market has thus caused real estate to become a particularly attractive investment to counter domestic inflation, particularly after the stock crashes in 2007 and again in June 2015.

Another short-run source of heightened demand was expansionary monetary policy. In 2015, with the aim of stimulating the real estate market and economy, the government eased restrictions for people applying for housing loans, which has encouraged many people to purchase homes, furthering the rapid rise in housing prices.

It is possible that this unexpected explosion in housing prices resulted in a frenzy among the Chinese middle class, who fear that future housing prices might reach an even more unaffordable level. As evidenced by the chart below, which is based on quarterly surveys from 2014 to 2016 conducted by the Statistics and Analysis Department at the People’s Bank of China, the percentage of respondents planning to purchase real estate hovered around 15 percent, and increased steadily to 20 percent by the end of 2016 Q4. This graph suggests that people’s desire to purchase housing has increased substantially, especially since this was a national survey covering 50 cities of varying sizes across the country.

In order to combat real estate speculation more effectively, the Chinese government should introduce higher taxes on homes that are bought and sold quickly. This would reduce people’s interest in short-run speculation since short-term profit would be substantially reduced. Such a measure would allow real estate profit to return to normal levels, and enable excess capital to flow to other industries. This tax was previously implemented in Hong Kong and was highly effective in curbing speculation.

Already, in an attempt to regulate and stabilize the real estate market, many local governments have introduced administrative eligibility regulations that would permit only local citizens to purchase local real estate. This measure prevents people from other provinces from investing and speculating in a region, and would thus reduce the demand for houses in so-called “first-tier” cities such as Beijing, Shanghai and Shenzhen. However, the regulation has only been effective in terms of temporarily freezing demand, and has not fundamentally reduced the underlying demand for houses.

In the long run, the Chinese government should seek to structurally correct this supply and demand imbalance. The government should further develop the domestic financial services industries to provide citizens with alternative investment options. Additionally, the government should improve transportation between large cities and nearby “satellite cities” in order to reduce the housing demand in large cities. The gradual increase in available housing in satellite cities and the reduction in demand for real estate as an investment would enable the Chinese housing market to restore stability in the long run. Otherwise, high prices may critically damage the development of the Chinese economy in terms of urbanization, consumption and innovation.

The rising tide of income inequality in the United States has grown too noticeable to ignore. The community integration of America’s richest and poorest families would level the drastic differences in environmental and educational opportunities between the rich and poor that exist today and greatly improve social mobility in regions where it is most lacking. It can be achieved by changing the way that federal and local governments approach housing policy and regulation. Although it seems counterintuitive, the federal government must reallocate its spending on low-income housing away from poor neighborhoods and instead invest in affordable housing development in “high opportunity” communities—areas with well-funded school systems and little crime. However, this cannot be achieved without stripping local governments of their restrictive zoning laws, which often act to exclude low-income families from feasibly entering these communities.

The US Department of Housing and Urban Development (HUD) currently spends $32.6 billion a year on developing affordable housing for low-income families and individuals. At first glance, allocating federal funds to the communities that need it most would seem like a sensible policy decision, and most housing nonprofits and state authorities would agree. These coalitions—typical of distressed neighborhoods in cities across the country—argue that subsidizing housing in locations that are already distressed will encourage their growth and revitalization. Yet, as the 2016 election nears and the nation’s burgeoning inequality demands more and more political attention, sociological and economic research has started to poke gaping holes in the conventional practices of the HUD and housing authorities across the country. The problem, they say, is that concentrating low-income development in areas already concentrated with low-income households will compound the US poverty trap for these families and individuals.

Indeed, it is far more likely that the activist organizations centered in these communities are simply desperate for grants and, additionally, that the politicians representing them are eager to claim credit for a façade of development and progress. Yet the money—and the development that comes with it—continues to be directed into low-income areas, and the outcomes are dubious. Many are now claiming that truly helping the poor with subsidies would require development to take place in the aforementioned “high opportunity” communities, which not only provide residents with a surplus of public and educational resources, but shield them from the traumas of crime and violence that are persistently rampant in some of America’s poorest neighborhoods. Yet resistance to any such proposals has been expectedly stiff. For decades the urban planners and administrators of the nation’s more exclusive communities have used zoning laws—laws regulating the use of real property—to exercise protection against their fears of low-earners “free-riding” their public school systems and the potential effects of affordable housing developments on the safety and overall ambience of their towns. Yet the impact of these laws creates not only significant economic segregation, but also daunting barriers to social mobility and abandons our least skilled and educated. The result is a country that is not only unequal but also systematically oppressive and suffocating to the poor.

As a first step, local governments in rich communities must be stripped of their excessive control over land use, not only to allow the government to fund affordable housing in these areas but also to open the door to private real estate developers and businesses who could capitalize on this deregulation. Achieving this would require serious political maneuvering—the constitutionality of zoning has been upheld for almost a century—and, more importantly, a greater public awareness of the socio-economic exclusion that zoning laws create.

In the early 2000s, housing prices took off as subprime loans made capital accessible to nearly anyone and increased demand throughout the market. In 2008, that bubble burst. Securities backed by real estate properties were rendered worthless thereby setting off a chain of events that led to one of the greatest recessions since the Great Depression of 1929. Now, as economic growth begins to pick up and we enter our 58th consecutive month of GDP growth, economists are beginning to wonder whether we are falling right back into the same trap that beset us in 2008.

A run-up in housing prices can occur due to a combination of demand, speculation, and belief that past trends in housing prices can be used to predict what will happen in the future. To test whether rises in housing prices indicate general trends of actual bubbles, some economists compare the Home Price Index with the Rent Index. When looking at this graphically, we can distinctively see the bubble that occurred in 2008.

Peter Wallison, an economist for the American Enterprise Institute, recently wrote an article in the New York Times claiming that there are many similarities between trends in housing prices today and those of the late 1990s and early 2000s. Wallison notes that from 1997-2002, housing prices grew by six percent compared to a 3.34 percent growth of rental prices. Similarly, since 2011, housing prices have grown 5.83 percent compared to an increase of only two percent in rental prices.

Among those who believe that we may be entering another bubble, opinion remains split as to its cause. Wallison blames government policies, such as low requirements on down payments, which allow individuals to buy homes too easily. He suggests that minimum down payments be raised from the current level of three to five percent to pre-1992 levels of 10 to 20 percent. Others believe that the Federal Reserve’s tax monetary policies could be fueling the rise in housing prices. Federal Reserve Governor, Jeremy Stein, stated that the Fed must be careful using expansionary tactics when risk estimates within the bond market are excessively low. Though Stein refused to voice his opinion on the Federal Reserve’s current policy, people believe that Stein would say that the Fed is being too accommodative and should take action to prevent bubbles from forming.

While some have voiced their criticism of current Fed policies, Fed Chairwoman, Janet Yellen, does not seem to be concerned about any rumors of upcoming bubbles. Her latest addresses have not even touched upon the risk that low interest rates could cause speculative run-ups in prices. In her latest address, Yellen made clear her intentions of maintaining low interest rates until the Fed deems unemployment rate is an acceptable level.

Yellen is in the unenviable position of having to decide what acceptable level of risk the Fed is willing to bring to the United States’ economy against policies that stimulate growth. Although the United States has officially been out of the recession for almost five years now, unemployment is still relatively high (6.8 percent) and the annualized rate of GDP growth in the United States in the last quarter of 2013 was an anemic 2.6 percent.

Given these facts, Yellen’s position defensible, especially when considering that no consensus has been reached on the subject of whether or not we are looking at a real bubble. According to Jed Tulko, the chief economist of the real estate company Trulia, housing prices are still undervalued by five percent. Of the 100 markets that Trulia monitors, housing prices are overvalued in only 19, compared to in 2008 when all 100 were overvalued. Tulko also notes that most of the overvalued markets are in locations that that have witnessed a significant influx of people, causing high demand and tight supply and a natural rise in home values.

For now, the best we can do is wait and see. WIth some luck, this is a temporary blip, and housing prices will soon return to a normal rate of growth. However, if this truly is a bubble, the Fed and policymakers must be especially vigilant and must make sure to clamp it down before it reaches a catastrophic size. Fresh out of the 2008 recession, many vividly remember the consequences of housing bubble’s burst and hope it does not repeat.

Chinese housing prices have risen in the past year for 69 of 70 of the largest Chinese cities, as tracked by the China Statistics Bureau. Furthermore, 10 of these cities have experienced housing price increases of over 10%. This general increase in prices is in part due to government policies preventing all except those who have government connections to import and export businesses and from investing outside the country. Thus, investors are left with two options: stocks and real estate. However, investments in the Chinese stock market are both risky and generally have low rates of return. Overall, the Shanghai SE composite index has declined 31.37% in the past 3 years while the bond market can also barely offer rates greater than the rate of inflation. Because of this, real estate is a far more common investment option. This has in turn created an increase in housing price driven by speculation and a real estate bubble in China.

There are those who argue that the real estate bubble is not actually a bubble and that the increase in price demonstrates a real increase in demand for housing due to increased urbanization and wage inflation. In the past year, China’s real GDP has increased 7.8% and income per capita has increased by 7.3%, reflecting inflated incomes. Furthermore, some economists believe that even if a supposed housing bubble were to burst in China, the effects would not be nearly so widespread or severe as the burst of theU.S. housing bubble due to the fact that China has a much lower residential mortgage debt than the U.S. at the time. In 2009, the U.S. had mortgage debt the size of 81.4% of its GDP while Chinese residential mortgage debt is only 15% of its GDP, as most Chinese buyers use cash for their real estate purchases.

However, the potential consequences of the rapid increase in housing prices cannot be ignored. Currently, the value of China’s residential property market is 115 trillion yuan, compared to 23 trillion for the stock market and 26 trillion for the bond market. As housing prices rise higher and higher, more and more Chinese savings are tied up in real estate. Right now, over 60% of households’ assets are in real estate and only around 20% in cash deposits. Furthermore, because housing investment now accounts for 11% of China’s total GDP, a decrease in housing prices resulting from the housing bubble’s burst would cause a significant decline in consumer spending, and this would in turn hinder China’s goal of encouraging consumption-led growth.

In addition, Premier Li Keqiang has set a 7.5% growth target for the economy this year and has stated that a growth rate below 7% would not be tolerable. Because of this, the government has still not announced any new policies regarding the regulation of real estate investment since former premier Wen Jiabo enacted a policy requiring higher down payments for second-mortgages in cities in April 2010. Continued lack of government effort in controlling the housing bubble in China could cause housing prices to plummet, as was the case in Wenzhou.

From the start of 2010 to the end of 2012, home prices in Wenzhou plummeted around 60%. This was mostly due to increased government regulations that came about October of 2010, in which restrictions on purchases were enacted and higher down payments on mortgages were required. As a result, demand for real estate dropped and a panic resulted in which investors scrambled to sell their properties. Were such a panic to happen on a large scale in the Chinese economy, households’ assets would be greatly affected, and as such, consumer spending would likely decrease. Due to this, the government is hesitant to enact more restrictive measures regarding real estate investment for fear that doing so will cause a rapid decline in housing prices and thus cause China to not meet its economic growth goal.

Certainly, there have been significant increases in housing prices in China in the last five years. However, whether this increase in real estate price signifies the presence of a housing bubble is debatable, as there are other factors pushing demand for housing to rise that are not purely speculative. Also, while the inflation of housing prices is somewhat concerning, as it creates the possibility of a panic driven real estate price tumble, at the moment it does not appear as though the Chinese government will pass policies to curb the increase in housing prices. At least for the immediate future, real estate will likely still offer the most lucrative rates of return for Chinese investors.