Are Housing Prices Sustainable in 35 Large and Medium-Sized Chinese Cities? A Study Based on the Cheap Talk Game and Dynamic GMM

Abstract

Focusing on the rapid rise of China’s housing prices in recent years, in this paper, we construct a model using the cheap talk game that centers on how information receivers in a market make inferences about the true state of the information based on the cost-free signals they receive and then make decisions based on these inferences, which in turn affect market equilibrium. By constructing a cheap talk game model of house prices, we examine the correlation between market expectations, economic fundamentals, and individual housing purchase decisions. Then, we conduct an empirical analysis using the dynamic GMM method based on the panel data of 35 large and medium-sized cities in China. The analysis reveals that: (1) when the whole of society expects housing prices to rise, housing prices will rise regardless of the true state of economic fundamentals; (2) when information on economic fundamentals is accurate and reliable, home buyers tend to make purchase decisions based on such information, thus maximizing the utility of society as a whole; but when information on economic fundamentals is unreliable, home buyers tend to make purchase decisions according to their own housing price expectations, which is not conducive to the optimization of the utility of society as a whole; (3) the empirical results also reveal that expectations are a non-negligible factor in the rise of housing prices, and the coefficient of expectations exceeds that of each economic fundamental; this demonstrates the investment-driven attribute of the housing market in China. At the same time, economic fundamentals have a definite effect on housing prices, which implies that the rise of housing prices in China is supported by objective conditions.