The user cost of housing and the price-rent ratio in Shanghai

Abstract

We compute hedonic quality-adjusted price-rent ratios for residential housing in Shanghai. Our method corrects for selection into owner-occupied housing and for omitted variables. We find that quality adjustment reduces the price-rent ratio by 14 percent. Even so, a price-rent ratio of 70 in 2017 is still very high by international standards. In cross-section, the price-rent ratio is increasing in price, confirming previous findings for cities in western countries. But it is decreasing in rents. We attribute this new finding to the asymmetric impact of the hukou system on owner-occupiers and renters in China. We then examine, in a user-cost setting, why the price-rent ratio is so high. The key driver is the extremely high rate of expected capital gains, which we argue has turned the user cost of owner-occupying negative. We explore how this affects the interpretation of observed price-rent ratios.