Housing Price and Fundamentals in A Transition Economy: The Case of Beijing Market

This paper develops a dynamic rational expectations general equilibrium framework that links house value to fundamental economic variables such as income growth, demographics, migration and land supply. Our framework is general and can handle non-stationary dynamics as well as structural changes in fundamentals. Applying the framework to Beijing, we find that the rational equilibrium housing price is substantially lower than the data under reasonable parametrizations of the model, unless the income level is seriously understated. We can rationalize the current housing price in Beijing in an extension of our model with endogenous migration of rich households from outside Beijing. Our model is able to capture the long-run historical trends of house price and rent in San Francisco. ∗Rotman School of Management, University of Toronto, [email protected] †Rotman School of Management, University of Toronto, [email protected] ‡Alberta School of Business, University of Alberta, [email protected].