Expectation, Speculation and Urban Housing Price Volatility in China

The paper incorporates expectation and speculation into a housing market equilibrium model to investigate the impact of expectation and speculation upon housing prices. The theoretical model illustrates that the higher is the rational expected housing price, the rampant is the speculation and the greater is the housing price volatility. However, the relation between adaptive expectation and the housing price volatility is complicated. The increase of the lagged housing price will give rise to the depreciation of current housing price, should the consumption demand dominates the aggregate demand. The increase of the lagged housing price, however, will lead to the escalation of current housing price provided that speculative demand dominates the aggregate demand. Using the data of 35 major cities in China from 1996 through 2007, the paper shows that expectation and its speculation are testified to have a greater influence on the housing price volatility. The other findings include: the role of the economic fundamentals is more important than that of the expectation, but it does not imply that the housing price volatilities in some cities will not derived from the expectation and speculation; the impact of the lagged housing price is greater than that of the forward housing price, which means the role of adaptive expectation is greater than that of rational expectation; the actual interest rate has the greatest impact on housing price volatility, which indicates that interest policies exacerbate housing price volatility; the role of household income is more significant than that of developing cost; the fast is the population growth, the greater is the housing price volatility, but the housing price volatility does not display a remarkable disparity across geographic locations.