Under the housing welfare policy scheme in China, allocation of housing is done by managers of the scheme; the houses belonged to the state and couldn’t be traded privately. Although houses are constructed every year, demand for housing has not kept pace with supply due to ever growing demand of the scarce facility. In 1998, the housing welfare allocation policy was abolished in order to reduce the cost of burden to government. This led to gradual relieve on those in need of housing to live in. However the change in policy led to successive price increase for housing exponentially over the last decade. Even though housing facilities became available, they are not accessible to many Chinese families due to the continuous increase in the prices. It is tough to afford the available houses to live in as prices keep increasing over time. The imbalances between the need for affordable housing by families and available inaccessible expensive housing have multiplying effect on the economy. It would lead to slow development of the housing market and industry as well as reduce quality of life for the masses, hence the for critical study of the underlying cause(s) of the problematic behavior. This paper, system dynamics method is applied to study the price increases problem. We found out that the feedback loop relating to the housing price and speculation of demand for housing is reinforcing; leading to further price increases over time. We have built system dynamic model to explain the relationship existing between inventory, housing price, consumption and speculative demand. We have also applied various tests to make this model robust, more valid and rational similar to real life situation. The speculative demand proved to be the main source of the price hike and therefore we formulated two policies recommendable to the effect of the feedback relationship between housing price increases and speculative demand thereby stabilizing the housing price increases.
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