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Fundamentals and the Volatility of Real Estate Prices in China: A Sequential Modelling Strategy

Yongheng Deng, Eric Girardin and Roselyne Joyeux
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Yongheng Deng: National University of Singapore
Eric Girardin: National Centre for Scientific Research (CNRS)
Roselyne Joyeux: Macquarie University

No 222015, Working Papers from Hong Kong Institute for Monetary Research

Abstract: In a similar way to the stock market, the housing market in China has often been portrayed as highly speculative, giving rise to ¡°bubble¡± concerns. Over the last decade, residential prices increased every year on average by double digits in Beijing or Shanghai (Deng, Gyourko and Wu, 2012). However many observers and researchers argue that the fundamentals of the housing sector, both sector-specific and macroeconomic, may have been the driving force behind housing price volatility. While existing empirical work exclusively relies on downward-biased official housing prices, this paper uses original high-frequency unit level residential price series for Beijing and Shanghai to test alternative hypotheses about the drivers of house price growth. We propose a sequential research strategy including the construction of hedonic prices, explosive unit root tests (Phillips, Shi and Yu, 2014), the filtering of microstructure noise (Bollerslev et al. 2015) and a Mixed Data Sampling (MIDAS) methodology (Ghysels et al, 2007; Engle et al., 2013) which enables us to document that fundamentals can indeed account for movements in housing price volatility, as well as transaction volume in first©\tier cities such as Beijing and Shanghai.

New Economics Papers: this item is included in nep-cna, nep-sea, nep-tra and nep-ure
Date: 2015-11
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