House Price Index Construction in the Nascent Housing Market: The Case of China

Abstract

Most existing house price index construction methods are developed mainly based on transaction data from the secondary housing market, and are not necessarily suitable for the nascent housing markets where a predominant portion of housing transactions are new units. Using the booming market in China as an example, we evaluate and compare the performances of three most common house price measurement methods in the newly-built housing sector, including the simple average method without quality adjustment, the matching approach with the repeat sales modeling framework, and the hedonic modeling approach. Our analyses suggest that the simple average method fails to account for the substantial complex-level quality changes over time of sales during our sample period, and the matching model fails to control for the effect of developers’ pricing behaviors when adopted in the newly-built sector, hence both are downward biased. Based on this finding, we apply a hedonic method, which allows us to control for both quality changes over time of sales and developers’ pricing behaviors, to 35 major newly-built housing markets and provide the first multi-city constant-quality house price index in China. The new index reveals that the current Chinese housing market is facing a greater risk of mispricing than reported by the existing official metrics.