The Decomposition Of Chinese Urban Housing Market Volatility

The housing market is segmented by region whose price volatility varies a lot in different places.The data reveals that there are obvious differences in the price level and price growth rate of houses in major cities of China.The prices of large and medium-sized cities have its own motion rules in the weak synchronization process and isn't the same with each other.In order to explain the above phenomenon,This paper decompose the price-rent ratios of 28 major Chinese cities into national and local factors.Based on the improved Campbell equation,we further refer the housing market volatility to rent,interest rate,and risk premium.Our findings are:(1)That the rapid growth of housing prices is often accompanied by strong fluctuations in the price-rent ratio will exacerbate the regional real estate market instability.In the entire sample period,about 64%of the price fluctuations in each city can be explained by local factor fluctuations.It can be seen that the local factor is the main factor of the real estate price fluctuation.(2)For local factors,the local risk premium fluctuation between different cities exist great differences.the local risk premium volatility is higher in some cities like Beijing,Shenzhen,Xiamen with an average of 0.091,while others such as Wuhan,Guizhou,Xi'an are lower,with an average of 0.041.Measured by the standard deviation,The volatility of the local risk premium is 2.6 times the local expected rental growth.It can be seen that most of the fluctuations in local factors can be explained by the local risk premium.(3)The fluctuation share of the local factor is significantly correlated with the standard deviation of the local risk premium,and the regression coefficient is significant.However,it is not related to the standard deviation of the local rental growth.therefore,cities with large share of local factors tend to have more obvious fluctuations of local risk premium(4)There is a strong positive correlation between the local basic pension insurance rate and the local risk premium and its volatility,while there is a negative correlation between the per capita savings and the risk premium and its volatility.(5)In cities with high local risk premium levels,the overall risk premium will be also higher,they together lead to difference in house price volatility.(6)The overall risk premium exists the mispricing which caused by distorted belief or speculation,it embodies that the nominal interest rate can explain most of the mispricing,and the actual rate is not available for explanation.Therefore,the fluctuation of nominal interest rate is the key factor that contributes to the changes of Chinese price rent ratio rather than which of the real interest rate,it also verify the existence of the money illusion of Chinese real estate market.