Long-Run and Short-Run Relationships between House and Stock Prices in China: Evidence from Pooled Mean Group Estimation

Abstract

Viewed as investment alternatives, real estate market and stock market are generally believed to be linked and the extent of such relationship, both short run adjustment and long run equilibrium, provides useful information for policy makers and practitioners. We rely upon both national and city level data from 1997 to 2012 to empirically examine the impact of stock market movements on housing prices dynamics in China. The empirical results on the national data indicate the existence of long-term relationship between the two markets and the unidirectional causality from stock market to housing market. Our heterogenous panel analysis on 35 cities reveal that stock market price could hardly explain housing price movements in the short run, after accounting for factors such as income, rent, and monetary measures. However, in the long run, we find positive impact of stock market performance on housing price, hence supporting the existence of wealth effect among the equity and property markets in China.