Topic：What Drives the Housing Markets in China: Rent, Cost of Capital, or Risk Premium of Owning relative to Renting?
Time：June 7, 2013（Friday）15:00-16：30
Venue：Room 513, Jiageng Bld 2
Presenter：Sichong Chen, associate professor in finance, Zhongnan University of Economics and Law
Abstract：
We combine the standard Campbell and Shiller (1988) present-value model with the classical user cost of housing model to decompose the rental yield into three components: expected future rent growth, cost of capital and risk premium of owning relative to renting. We then apply a quarterly dataset of four major cities (Beijing, Shanghai, Guangzhou and Shenzhen) to explore the question of what forces have driven the movement of China’s housing market. Specifically, using the variance decomposition approach to examine quantitatively how much the variation in rental yield comes from the above-mentioned three components. Our results show that cost of capital is playing a vital role in all the four major cities, while the future rent growth is not a driving force as significant as the cost of capital in the fluctuation of the rental yield. Moreover, we find that another factor -- the risk of owning relative to renting a house -- is accounting for a large part of housing market movement in China. It is also worth noting that the risk of renting relative to owning a house seems to be rising rapidly in China over the recent years.
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