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The User Cost of Housing and the Price-Rent Ratio in Shanghai

Jie Chen (), Yu Chen, Robert Hill () and Pei Hu ()
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Jie Chen: Shanghai Jiao Tong University, China
Yu Chen: University of Graz, Austria
Pei Hu: Shanghai Pudong Development Bank and Fudan University, China

No 2020-19, Graz Economics Papers from University of Graz, Department of Economics

Abstract: We show that simple median price-rent ratios in Shanghai are distorted by quality differences between sold and rented properties. Correcting for these quality differences using hedonic methods reduces the price-rent ratio by 14%. Even so, the price-rent ratio in Shanghai (at about 67) is still extremely high by international standards. From a user cost perspective, such a large price-rent ratio is driven mainly by the very high rate of expected capital gains on housing. If households form their expectations by simply extrapolating past price trends, we find that the user cost of owner-occupying in Shanghai is negative (implying that everyone except short-term residents wants to owner occupy rather than rent). While for many years the user cost was probably negative, such a situation is not sustainable going forward. By international standards, house prices in Shanghai are already high, which limits the potential for further growth. Expected capital gains, therefore, need to start falling soon to prevent the emergence of a housing bubble.

Keywords: Shanghai housing market; Price-rent ratio; User cost; Hedonic quality adjustment; Capital gains. (search for similar items in EconPapers)
JEL-codes: C43 E01 E31 R31 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-mac and nep-ure
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