Hedging House Price Risk in China

27 Pages Posted: 20 Jan 2017

See all articles by Jia He

Jia He

Nankai University

Jing Wu

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

Haishi Li

Tsinghua University

Date Written: Spring 2017

Abstract

The increasing risk associated with China’s housing prices is globally recognized. However, hedging this risk is challenging because of a lack of financial derivatives on China’s housing assets. We suggest that the short sale of futures contracts for construction raw materials, i.e., iron ore or/and steel, can act as useful tools to hedge the systematic risk of China’s new home price. We first present evidence that there is a strong and stable correlation between changes in China’s housing prices and global steel/iron ore prices. Using a hedging strategy model, we then show that, during the sample period between 2009 and 2015, 20.6% of the total unpredicted variance in Chinese housing prices can be hedged by shorting rebar and iron ore futures. We further examine this strategy with an event study based on the announcement of the “home‐purchase restriction” policy in April, 2010. The cumulative abnormal returns show that both steel and iron ore prices reacted significantly to this negative shock, and therefore the proposed strategy could substantially help investors offset losses in the housing market. We finally provide some evidences that this strategy can also help investors in specific regional housing markets, or the resale housing markets.

Suggested Citation

He, Jia and Wu, Jing and Li, Haishi, Hedging House Price Risk in China (Spring 2017). Real Estate Economics, Vol. 45, Issue 1, pp. 177-203, 2017, Available at SSRN: https://ssrn.com/abstract=2902385 or http://dx.doi.org/10.1111/1540-6229.12147

Jia He (Contact Author)

Nankai University ( email )

94 Weijin Road
Tianjin, 300071
China

Jing Wu

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

Haishi Li

Tsinghua University ( email )

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