Land and House Price Measurement in China
The typical market experienced an annual growth in constant quality land prices of 10 percent, with the top third of the sample reaching 20 percent annual growth.
In light of the role of the housing bubble in the most recent U.S. economic crisis, questions have begun to emerge about the stability of house prices in China where values have increased rapidly. In Land and House Price Measurement in China (NBER Working Paper No. 18403), Yongheng Deng, Joseph Gyourko, and Jing Wu construct constant-quality real land price indexes using data based on auction sales that took place in 35 major cities in China from 2003 to 2011. They provide the first comprehensive description of major local land markets in China and estimate a measure of housing price appreciation for eight of those cities.
They find that residential land values skyrocketed in China between 2003 and 2011. The typical market experienced an annual growth in real, constant quality land prices of 10 percent, with the top third of the sample reaching 20 percent annual growth. This phenomenon was not limited to big coastal markets such as Beijing and Shanghai. In fact, land prices tended to move in the same way across most markets in a given year, driven essentially by the macroeconomic environment and national market sentiment, rather than by local market factors. However, land prices were extremely volatile from year to year, with large drops in prices during the global financial crisis. Land prices fell by half by the end of the stimulus period (2009-10).
The aggregate supply of space roughly doubled between 2008 and 2011 in the 35 cities in the sample. Political economy factors explain some of this variation in supply. Land sale volumes are higher when a new local Chinese Communist Party chief takes office, or when the local government is in budgetary deficit. In the first quarter of 2012, though, transaction volumes plummeted in most major Chinese cities, especially in coastal markets.
The authors also attempt to measure house price appreciation in China, as distinct from land price appreciation. They argue that because the Chinese housing market has much new construction and a relatively small number of repeat sales, a hedonic price model will generate a more accurate picture of house price growth in China than traditionally preferred repeat sale price indexes. The authors construct such an index for newly-built homes for eight major markets in China and then compare their index to existing house price series, which focus exclusively on newly-built housing units but make no attempt to control for housing characteristics such as location, density, and site quality. Their index suggests that housing price growth was very high in virtually all markets, exceeded the growth exhibited in existing indexes, and was driven by the land market rather than by construction costs or construction sector wages.