Fundamentals and the volatility of real estate prices in China: A sequential modelling strategy (original) (raw)

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) * We would like to thank Eric Ghysels and Bumjean Sohn for providing us the GARCH-MIDAS program to extract the long run volatility component used in this paper. The paper benefited from comments by an anonymous referee from HKIMR. Eric Girardin thanks HKIMR and Roselyne Joyeux AMSE for support from their respective visiting researcher programmes.