Exploring determinants of housing prices: A case study of Chinese experience in 1999–2010

How do macroeconomic variables affect housing prices? In this paper we apply a non-linear modeling approach, the Nonlinear Auto Regressive Moving Average with eXogenous inputs (NARMAX), to investigate determinants of housing prices in China over the period 1999:01 to 2010:06. The NARMAX approach, combined with the famous Vector Error Correction Model (VECM), has an advantage over prevailing methods in that it automatically selects linear and non-linear forms of variables and the numbers of corresponding lags according to statistical properties. Estimation results mainly identify some key monetary and price variables in interpreting housing price dynamics, including most notably mortgage rate, producer price, broad money supply and real effective exchange rate. Meanwhile, real economic variables such as income are not independently significant.