Housing markets in China: an empirical evaluation of present-value model

Abstract

Derived from the present-value model, our model implies that house price is a linear function of expected house rents and the expected rate of growth of house rents where expectations are formed adaptively. The model is used to explain the link between expected inflation and expected house rental growth rates. The estimated parameters of the housing markets in Hong Kong, Shanghai, Guangzhou and Shenzhen were compared.

Keywords:

• housing markets
• adaptive expectations
• house rents
• China

Acknowledgement

The authors would be to thank Professor Gregory Chow, Princeton University for advice in using non-linear regression models.

Notes

Notes

1. This is the St. Johns Church in Central.

2. The housing rent collected accounted for only a third of the maintenance cost and 4% of the housing provision cost (World Bank, 1992).

3. This indicates that replacement costs of depreciating assets are constantly rising because of inflation (Wheaton and Torto, 1989). This assumption would be realistic in long-run equilibrium.

4. If the discount rate is larger than the inflation rate, then the asset price must grow at a rate faster than the general price level. This situation cannot be sustained in the long run.

5. Alternatively, inflation rates can be weighted to compute an average measure of expected inflation over the term to maturity.

6. The Cornell model suggests that the discount rate is a combination of the risk-free interest rate (i_f ) and a risk premium (μ). Thus, the nominal interest rate i ≥ (i_f + μ) ≥ π. There are different ways to estimate the structure of the discount rate. However, this issue is another paper.

7. Alternatively, cross-sectional data can be used (see Chow, Fan and Hu 1999).

8. In computing the Consumer Price Index A, the average retail prices of the principal foodstuffs are obtained by price investigators from market stalls and shops throughout Hong Kong during the periods specified. The expenditure weights of the indexes were derived from the results of the Household Expenditure Survey.