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Local Housing Market Sentiments and Returns: Evidence from China
Shulin Shen1, Yiyi Zhao1, Jindong Pang2
1School of Economics, Huazhong University of Science and Technology, 1037 Luoyu Road, Wuhan, 430074 Hubei China.
The Journal of Real Estate Finance and Economics
|April 16, 2024
Summary
Local housing sentiments significantly predict Chinese housing returns, showing short-run underreaction and long-run overreaction. These sentiments create a feedback loop, potentially fueling market fever, especially in cities with inelastic housing supply.
Area of Science:
- Economics
- Real Estate Finance
- Behavioral Finance
Background:
- Understanding the drivers of housing price dynamics is crucial for economic stability.
- The role of market sentiment in asset pricing is a growing area of research.
- China's housing market is a significant component of its national economy.
Purpose of the Study:
- To investigate the impact of local housing sentiments on Chinese housing price dynamics.
- To construct reliable local housing sentiment indices using a large transaction dataset.
- To analyze the predictive power and characteristics of these sentiment indices.
Main Methods:
- Construction of monthly local housing sentiment indices for 18 major Chinese cities (Jan 2016 - Oct 2020).
- Development of three sentiment proxies reflecting market liquidity and speculative behaviors.
- Application of partial least squares (PLS) for a recursive, look-ahead-bias-free sentiment index extraction.
Main Results:
- Local housing sentiments robustly predict future housing returns, exhibiting short-run underreaction and long-run overreaction.
- Impacts of housing sentiment are asymmetric, with greater sensitivity in cities with inelastic housing supply.
- A significant feedback effect between housing returns and market sentiments indicates a pricing-sentiment spiral.
Conclusions:
- Local housing sentiments are a key determinant of housing price dynamics in China.
- The identified pricing-sentiment spiral may exacerbate housing market volatility.
- Findings are robust to alternative sentiment extraction methods and proxies, and consistent pre-COVID-19.
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