Sentiment, Expectations and Real Estate Prices
—Evidence from China

Abstract

From the perspective of behavioral finance, this thesis utilizes the real estate data since China's market-oriented reform to investigate the influence of sentimental variables and expectations on real estate prices.
As the first topic of the research, Chapter 2 of this thesis takes China’s state level Consumer Expectation Index as proxy variable of consumers’ aggregated sentiment, and adopts the method of time series to empirically research on the relationship between the sentiment and China’s real estate prices. The research result indicates that there is long-term cointegrating relationship between the consumers’ aggregated sentiment and real estate prices, and the influence of the sentiment on real estate prices is stronger than the fundamental indicators in the traditional analytical framework such as M2, GDP, etc.
For the purpose of further distinguishing the influence of psychological factors on real estate prices, and investigating data at a more detailed level, Chapter 3 of the thesis adopts panel data model to research the influence of sentiment of the market opinion leaders (entrepreneurs) on house prices of different provinces. The estimation result of the overall panel data indicates that the sentiment of entrepreneurs significantly affects house prices. Then, the country is divided into three areas: eastern, central and western areas, of which the estimation results indicate that the degree of the sentimental influence on house prices is positively correlated with the degree of market maturity. The maturer the market is, the more likely it is to be affected by the psychological factors. The conclusion of endogenous test shows that the sentiment of entrepreneurs is independent of other economic fundamentals and directly affects the prices of housing property.
Chapter 4 of the thesis examines the influence of the promotion expectations of Chinese local officials (governors) on house prices from the perspective of public administration. China adopts a unique promotion system of local officials similar to yardstick competition, which has had a broad and profound influence on China's real estate market. This chapter first illustrates the theoretical mechanism that triggers China’s land finance. And on this basis, it carries an empirical study on the influence of promotion expectations of local officials on land prices and then the house prices. The test results indicate that the promotion expectations of China’s local officials have long-term and profound influence on house prices, which help us to better understand the unique mechanism of China's sustained rapid development. The public administrative policies outlined in Chapter 4 have important reference to other developing countries.