A Tale of Four Cities: A Cross-Examination of Macro-Economic Factors that Drive Housing Prices in China's Metropolises

Abstract

Prior to Deng Xiaoping’s reforms in the late 1900s, China was ostensibly an agricultural, socialist, and 平等 (or equal) society, a fulfillment of Mao’s vision for the country. In two decades, the country transformed. As of 2010, China’s real estate industry is the largest in the world. This stark contrast of and rapid transformation between an agricultural and predominantly rural society and nation comprised of bustling metropolises is both confusing and captivating. Indisputably, the nature and speed of this metamorphosis is unprecedented.

Just as the economy grew, China’s wealth gap widened (and continues to do so). Real estate is one of the most prevalent investment asset classes among individuals in China, and thus housing prices are key measures of interest in our observation of the economic landscape in the country’s cities. We focus our study on the four cities of Beijing, Shanghai, Hohhot and Urumqi. What factors drive the real estate industries of these four cities? How can housing prices of these four cities be modeled using nationwide macro-economic factors and citywide macro-economic factors? Do the relationships of housing prices with respective factors differ across cities?

Ultimately, we explore the historical development and current role of the real estate market in Chinese society. Moreover, we analyze the relationship between housing prices and nationwide and citywide factors. Using linear and non-linear regression models, we find that Shanghai’s housing prices are least explainable by nationwide and citywide factors, likely attributable to its unique status as a financial epicenter of China. On the other hand, Hohhot’s housing prices are most explainable by nationwide and citywide factors. We also note that significant factors differ across cities, a result that signifies the diversity in the overall real estate market. Lastly, nationwide macro-economic factors are more explanatory than citywide factors for the most part, corroborating that local real estate markets may be more tied to the national economy and government policies than to regional economies.