Rethinking the relationship between housing prices and inflation: new evidence from 29 large cities in China
Abstract
This paper presents a longitudinal analysis of the relationship between housing prices and inflation by employing new housing price indices from 29 large Chinese cities over the 2003–2013 period. Based on the Autoregressive Distributive Lag (ARDL) model and bounds test, we find no long-run co-integration relationship between housing prices and inflation. This result is robust for different types of inflation (actual, expected, unexpected inflation). Furthermore, it is found that the housing prices in China grow spectacularly in the sample period owing to the dramatic development of the Chinese economy, while inflation grows in a more modest way. Although the study is conducted in the context of China, the results can provide useful evidence to the debate on the relationship between housing prices and inflation.
Keyword : housing price index, inflation, consumer price index, unit root tests, ARDL model, bounds test
How to Cite
Tang, J., Ye, K., & Qian, Y. (2019). Rethinking the relationship between housing prices and inflation: new evidence from 29 large cities in China. International Journal of Strategic Property Management, 23(3), 142-155. https://doi.org/10.3846/ijspm.2019.7800
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Lu, S. (2016). Estimation of CPI component project weight and 2016 trend forecast. Bonds, 4, 58-60 (in Chinese).
Ma, L., & Liu, C. (2008). Estimating impacts of consumer prices on house prices. In Proceedings of the 37th Australian Conference of Economists, Gold Coast, Queensland, Australia (pp. 1-16). Brisbane, Qld: Economic Society of Australia.
Pesaran, M. H., & Shin, Y. (1999). An autoregressive distributed lag modelling approach to cointegration analysis. In S. Strom (Ed.), Econometrics and economic theory in the 20th century: the Ragnar Frisch centennial symposium (pp. 371-413). Cambridge: Cambridge University Press. https://doi.org/10.1017/CCOL521633230.011
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. https://doi.org/10.1002/jae.616
Qiu, L. (2011). Analysis of real estate hedging inflation. Times Finance, 11, 182-183 (in Chinese).
Sing, T., & Low, S. Y. (2000). The inflation-hedging characteristics of real estate and financial assets in Singapore. Journal of Real Estate Portfolio Management, 6(4), 373-385.
Wu, J., Gyourko, J., & Deng, Y. (2016). Evaluating the risk of Chinese housing markets: what we know and what we need to know. China Economic Review, 39, 91-114. https://doi.org/10.1016/j.chieco.2016.03.008
Wu, Y., & Tidwell, A. (2015). Inflation-hedging properties of regional Chinese real estate market: evidence from 35 cities in China. Applied Economics, 47(60), 6580-6598. https://doi.org/10.1080/00036846.2015.1080811
Yu, H., & Huang, Y. (2016). Regional heterogeneity and the trans-regional interaction of housing prices and inflation: evidence from China’s 35 major cities. Urban Studies, 53(16), 3472-3492. https://doi.org/10.1177/0042098015617882
Amonhaemanon, D., De Ceuster, M. J. K., Annaert, J., & Le Long, H. (2013). The inflation-hedging ability of real estate evidence in Thailand: 1987–2011. Procedia Economics and Finance, 5, 40-49. https://doi.org/10.1016/S2212–5671(13)00007–5
Anari, A., & Kolari, J. (2002). House prices and inflation. Real Estate Economics, 30(1), 67-84. https://doi.org/10.1111/1540–6229.00030
Arnold, S., & Auer, B. R. (2015). What do scientists know about inflation hedging? The North American Journal of Economics and Finance, 34, 187-214. https://doi.org/10.1016/j.najef.2015.08.005
Barber, C., Robertson, D., & Scott, A. (1997). Property and inflation: the hedging characteristics of U.K. commercial property, 1967–1994. The Journal of Real Estate Finance and Economics, 15(1), 59-76. https://doi.org/10.1023/A:1007749305400
Bodie, Z. (1976). Common-stocks as a hedge against inflation. Journal of Finance, 31(2), 459-470. https://doi.org/10.2307/2326617
Bond, M. T., & Seiler, M. J. (1998). Real estate returns and inflation: an added variable approach. Journal of Real Estate Re-search, 15(3), 327-338.
Christou, C., Gupta, R., Nyakabawo, W., & Wohar, M. E. (2018). Do house prices hedge inflation in the US? A quantile cointegration approach. International Review of Economics & Finance, 54, 15-26. https://doi.org/10.1016/j.iref.2017.12.012
Fama, E. F., & Schwert, G. W. (1977). Asset returns and inflation. Journal of Financial Economics, 5, 115-146. https://doi.org/10.1016/0304–405X(77)90014–9
Fang, H., Gu, Q., Xiong, W., & Zhou, L.-A. (2016). Demystifying the Chinese housing boom. NBER Macroeconomics Annual, 30(1), 105-166. https://doi.org/10.1086/685953
Fisher, I. (1930). The theory of interest. New York, NY: Macmillan.
Gatzlaff, D. H. (1994). Excess returns, inflation and the efficiency of the housing market. Journal of the American Real Estate and Urban Economics Association, 22(4), 553-581. https://doi.org/10.1111/1540–6229.00649
Glascock, J. L., Feng, L., Fan, L., & Bao, H. X. (2010). Inflation hedging characteristics of real estate assets in Hong Kong. SSRN Electronic Journal, 301(1), 107-109. https://doi.org/10.2139/ssrn.1180658
Hoesli, M. (1994). Real estate as a hedge against inflation: learning from the Swiss case. Journal of Property Valuation and Investment, 12(3), 51-59. https://doi.org/10.1108/14635789410063913
Hoesli, M., Lizieri, C., & MacGregor, B. (2008). The inflation hedging characteristics of US and UK investments: a multi-factor error correction approach. Journal of Real Estate Finance and Economics, 36(2), 183-206. https://doi.org/10.1007/s11146–007–9062–6
Hoesli, M., MacGregor, B. D., Matysiak, G., & Nanthakumaran, N. (1997). The short-term inflation-hedging characteristics of UK real estate. Journal of Real Estate Finance and Economics, 15(1), 27-57. https://doi.org/10.1023/A:1007797221329
Huang, H., & Hudson-Wilson, S. (2007). Private commercial real estate equity returns and inflation - new news on hedging power. The Journal of Portfolio Management, 33(5), 63-73. https://doi.org/10.3905/jpm.2007.698906
Ibbotson, R. G., & Siegel, L. B. (1984). Real estate returns: a comparison with other investments. Journal of the American Real Estate & Urban Economics Association, 12(3), 219-242. https://doi.org/10.1111/1540–6229.00320
Kuang, W., & Liu, P. (2015). Inflation and house prices: theory and evidence from 35 major cities in China. International Real Estate Review, 18(1), 217-240.
Larsen, E. R., & Sommervoll, D. E. (2004). Rising inequality of housing: evidence from segmented house price indices. Housing, Theory & Society, 21(2), 77-88. https://doi.org/10.1080/14036090410034357
Lee, C. L. (2014). The inflation-hedging characteristics of Malaysian residential property. International Journal of Housing Markets and Analysis, 7(1), 61-75. https://doi.org/10.1108/IJHMA–10–2012–0053
Leung, A. (2010). Commercial property as an inflation hedge: an Australian perspective. Pacific Rim Property Research Journal, 16(1), 97-115. https://doi.org/10.1080/14445921.2010.11104297
Li, L. H., & Ge, C. L. (2008). Inflation and housing market in Shanghai. Property Management, 26(4), 273-288. https://doi.org/10.1108/02637470810894902
Lu, S. (2016). Estimation of CPI component project weight and 2016 trend forecast. Bonds, 4, 58-60 (in Chinese).
Ma, L., & Liu, C. (2008). Estimating impacts of consumer prices on house prices. In Proceedings of the 37th Australian Conference of Economists, Gold Coast, Queensland, Australia (pp. 1-16). Brisbane, Qld: Economic Society of Australia.
Pesaran, M. H., & Shin, Y. (1999). An autoregressive distributed lag modelling approach to cointegration analysis. In S. Strom (Ed.), Econometrics and economic theory in the 20th century: the Ragnar Frisch centennial symposium (pp. 371-413). Cambridge: Cambridge University Press. https://doi.org/10.1017/CCOL521633230.011
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. https://doi.org/10.1002/jae.616
Qiu, L. (2011). Analysis of real estate hedging inflation. Times Finance, 11, 182-183 (in Chinese).
Sing, T., & Low, S. Y. (2000). The inflation-hedging characteristics of real estate and financial assets in Singapore. Journal of Real Estate Portfolio Management, 6(4), 373-385.
Wu, J., Gyourko, J., & Deng, Y. (2016). Evaluating the risk of Chinese housing markets: what we know and what we need to know. China Economic Review, 39, 91-114. https://doi.org/10.1016/j.chieco.2016.03.008
Wu, Y., & Tidwell, A. (2015). Inflation-hedging properties of regional Chinese real estate market: evidence from 35 cities in China. Applied Economics, 47(60), 6580-6598. https://doi.org/10.1080/00036846.2015.1080811
Yu, H., & Huang, Y. (2016). Regional heterogeneity and the trans-regional interaction of housing prices and inflation: evidence from China’s 35 major cities. Urban Studies, 53(16), 3472-3492. https://doi.org/10.1177/0042098015617882