Local Housing Market Sentiments and Returns: Evidence from China

Shulin Shen (), Yiyi Zhao () and Jindong Pang
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Shulin Shen: Huazhong University of Science and Technology
Yiyi Zhao: Huazhong University of Science and Technology

The Journal of Real Estate Finance and Economics, 2024, vol. 68, issue 3, No 5, 488-522

Abstract: Abstract This paper examines the impacts of local housing sentiments on the housing price dynamics of China. With a massive second-hand transaction dataset, we construct monthly local housing sentiment indices for 18 major cities in China from January 2016 to October 2020. We create three sentiment proxies representing the local housing market liquidity and speculative behaviors from the transaction dataset and then use partial least squares (PLS) to extract a recursive look-ahead-bias-free local housing sentiment index for each city considered. The local housing sentiments are shown to have robust predictive powers for future housing returns with a salient short-run underreaction and long-run overreaction pattern. Further analysis shows that local housing sentiment impacts are asymmetric, and housing returns in cities with relatively inelastic housing supply are more sensitive to local housing sentiments. We also document a significant feedback effect between housing returns and market sentiments, indicating the existence of a pricing-sentiment spiral which could potentially enhance the ongoing market fever of Chinese housing markets. The main estimation results are robust to alternative sentiment extraction methods and alternative sentiment proxies, and consistent for the sample period before COVID-19.

Keywords: Housing market; Sentiment; Market liquidity; Speculation; PLS (search for similar items in EconPapers)
JEL-codes: G41 P25 R30 R31 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11146-022-09933-w

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