House Price Index Construction in the Nascent Housing Market: The Case of China

Posted: 25 Mar 2014

See all articles by Jing Wu

Jing Wu

Tsinghua University - Hang Lung Center for Real Estate; Tsinghua University - Department of Construction Management

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Hongyu Liu

Tsinghua University - Institute of Real Estate Studies

Date Written: March 24, 2014

Abstract

Most existing house price index construction methods are developed manly based on transaction data from the secondary housing markets, and are not necessarily suitable for the nascent housing markets where a predominant portion of housing transactions are new units. Using the booming market in China as an example, we evaluate and compare the performances of three most common house price measurement methods in the newly-built housing sector, including the simple average method without quality adjustment, the matching approach with the repeat sales modeling framework, and the hedonic modeling approach. Our analyses suggest that the simple average method fails to account for the substantial complex-level quality changes over time of sale during our sample period, and the matching model fails to control for the effect of developers' pricing behaviors when adopted in the newly-built sector, hence both are downward biased. Based on this finding, we apply a hedonic method, which allows us to control for both quality changes over time of sales and developers' pricing behaviors, to 35 major newly-built housing markets and provide the first multi-city constant-quality house price index in China. The new index reveals that the current Chinese housing market ifs facing a greater risk of mispricing than reported by the existing official metrics.

Keywords: House price index; Hedonic method; Quality change; Nascent housing market

JEL Classification: C43, C81, R31

Suggested Citation

Wu, Jing and Deng, Yongheng and Liu, Hongyu, House Price Index Construction in the Nascent Housing Market: The Case of China (March 24, 2014). Journal of Real Estate Finance and Economics, Vol. 48, No. 3, 2014. Available at SSRN: https://ssrn.com/abstract=2413940

Jing Wu (Contact Author)

Tsinghua University - Hang Lung Center for Real Estate ( email )

HeShanHeng Building
Beijing, 100084
China

HOME PAGE: http://thuwujing.net

Tsinghua University - Department of Construction Management ( email )

Heshanheng Building
Tsinghua University
Beijing, 100084
China

HOME PAGE: http://thuwujing.net

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Phone)

HOME PAGE: http://https://bus.wisc.edu/faculty/yongheng-deng

Hongyu Liu

Tsinghua University - Institute of Real Estate Studies ( email )

School of Civil Engineering
Beijing, 100084
China
8610-62795115 (Phone)
8610-62788678 (Fax)

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