Essays on the Chinese and the U.S. Housing Markets

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Doctor of Philosophy (PhD)
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Applied Economics
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Housing is one of the most important assets for households and has profound implications for the economy. Housing markets in different nations may differ in institutional backgrounds and phases of housing cycles, but people across the world are faced with some similar challenges in understanding housing markets. This dissertation is international in scope and focuses on certain aspects of the housing cycles. It consists of two chapters -- the first looks at boom-taming housing policies in China and the second investigates the role of contagion in the previous U.S. housing cycle. Chapter 1 examines the impact of major housing policy interventions in China. While research in the Chinese housing market has been hampered by severe data limitations, I propose turning to the stock market, where high quality and high frequency data on real estate firms are available. An event study analysis is conducted on the April 2010 central government announcement, which suddenly and sharply reversed prior policies and initiated efforts to cool the housing market by tightening mortgage credit supply. I find that publicly traded housing developers listed on the Shanghai, Shenzhen or Hong Kong stock exchanges suffered an average of -15% cumulative abnormal return (CAR) in a short event window around the policy announcement. This loss in firm value indicates that the policy intervention is well-received by the market. Transaction volumes are likely to decline in the short run and the steady-state house price appreciation rate is expected to drop as well. There also is noteworthy heterogeneity in the CAR, with firms that engage in some non-residential development performing about three percentage points better. Firms whose largest shareholder is a state-owned enterprise affiliated with the central government perform about five percentage points worse. This latter result provides useful insights into the relative magnitudes of the costs and benefits of having special connections to the central government. In Chapter 2, which is written jointly with Anthony DeFusco, Fernando Ferreira and Joe Gyourko, we investigate whether contagion in the housing market, which is defined as the price correlation across space between two different metropolitan areas above and beyond that justified by common local shocks, was an important factor in the last American housing cycle. We implement empirical strategies that help address concerns that plague prior contagion-related research. Besides that, the richness of our proprietary housing transaction data allows us to directly estimate the importance of contagion mechanisms. We find that contagion effects arise during the housing boom, and only from the very closest neighbor -- the elasticity of focal market prices with respect to changes in its nearest neighbor's prices is in the range of 0.10-0.27. This is large enough to account for up to 30% of the jump in home prices at the beginning of local booms, on average. There is noteworthy heterogeneity in this result, with contagion impacts being much greater when transmitted from a larger to a smaller market, and also more important for the most elastically-supplied markets. Finally, local fundamentals and expectations of future fundamentals have very limited ability to account for our estimated effect. This suggests a potential role for non-rational forces in generating house price expectations.

Joseph Gyourko
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