Fundamental factors in the housing markets of China

This paper seeks to understand the importance of changes in the fundamental factors of demand and supply, such as the urban hukou population, wage income, urban land supply, and construction costs, in explaining the rising residential housing prices in major Chinese cities between 2002 and 2008. We propose an empirical approach that uses both city-level and residential development project-level data. Results suggest that, for most of the cities in our sample, changes in fundamental factors can account for a major proportion of the actual housing price appreciation. However, in several coastal cities, the actual increase in housing prices deviates largely from what can be predicted from fundamental changes.