Do Construction Costs Reflect the True Information in the Real Estate Markets

Abstract

Many academics criticized municipal governments and state-owned enterprises (SOEs) promote land prices to increase. The criticism is based on the assumption that land prices reflect the true information in the land transactions. However, municipal governments and SOEs might be misled by information hidden in land prices. Land prices are a part of construction costs. My contribution was to find out whether construction costs provide misleading information. The methodologies were based on the fixed- effects model and the dynamic model considering cross-section dependence, using the fixed- effects regression and the augmented mean group estimation. By studying the relationships between construction costs and factors affecting construction costs, I found that construction costs do not response to any change in different variables, which are average incomes and real estate investments except the bubbles. Therefore, construction costs deliver misleading information, which violates the assumption, many academic believed.