Club Convergence of House Prices: Evidence from China's Ten Key Cities

TL;DR

This study investigates the convergence patterns of house prices across China's ten key cities, revealing high systemic risk, city clustering into clubs, and tier-based growth differences using advanced econometric methods.

Contribution

It provides the first comprehensive analysis of Chinese housing market convergence, identifying city clubs and systemic risk factors with robust econophysical and econometric techniques.

Findings

Cities form distinct convergence clubs.

A common driving force explains 96.5% of price growth.

First-tier cities' prices grow fastest, third- and fourth-tier slowest.

Abstract

The latest global financial tsunami and its follow-up global economic recession has uncovered the crucial impact of housing markets on financial and economic systems. The Chinese stock market experienced a markedly fall during the global financial tsunami and China's economy has also slowed down by about 2\%-3\% when measured in GDP. Nevertheless, the housing markets in diverse Chinese cities seemed to continue the almost nonstop mania for more than ten years. However, the structure and dynamics of the Chinese housing market are less studied. Here we perform an extensive study of the Chinese housing market by analyzing ten representative key cities based on both linear and nonlinear econophysical and econometric methods. We identify a common collective driving force which accounts for 96.5\% of the house price growth, indicating very high systemic risk in the Chinese housing market. The ten key cities can be categorized into clubs and the house prices of the cities in the same club exhibit an evident convergence. These findings from different methods are basically consistent with each other. The identified city clubs are also consistent with the conventional classification of city tiers. The house prices of the first-tier cities grow the fastest, and those of the third- and fourth-tier cities rise the slowest, which illustrates the possible presence of a ripple effect in the diffusion of house prices in different cities.