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The User Cost of Housing and the Price-Rent Ratio in Shanghai

Author

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  • Jie Chen

    (Shanghai Jiao Tong University, China)

  • Yu Chen

    (University of Graz, Austria)

  • Robert J. Hill

    (University of Graz, Austria)

  • Pei Hu

    (Shanghai Pudong Development Bank and Fudan University, China)

Abstract

We show that simple median price-rent ratios in Shanghai are distorted by quality differences between sold and rented properties. Correcting for these quality differences using hedonic methods reduces the price-rent ratio by 14%. Even so, the price-rent ratio in Shanghai (at about 67) is still extremely high by international standards. From a user cost perspective, such a large price-rent ratio is driven mainly by the very high rate of expected capital gains on housing. If households form their expectations by simply extrapolating past price trends, we find that the user cost of owner-occupying in Shanghai is negative (implying that everyone except short-term residents wants to owner occupy rather than rent). While for many years the user cost was probably negative, such a situation is not sustainable going forward. By international standards, house prices in Shanghai are already high, which limits the potential for further growth. Expected capital gains, therefore, need to start falling soon to prevent the emergence of a housing bubble.

Suggested Citation

  • Jie Chen & Yu Chen & Robert J. Hill & Pei Hu, 2020. "The User Cost of Housing and the Price-Rent Ratio in Shanghai," Graz Economics Papers 2020-19, University of Graz, Department of Economics.
    • Handle: RePEc:grz:wpaper:2020-19
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    More about this item

    Keywords

    Shanghai housing market; Price-rent ratio; User cost; Hedonic quality adjustment; Capital gains.;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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