Housing Market Sentiment and Intervention Effectiveness : Evidence from China

With a micro-level data, this paper constructs the first sentiment index for the Shanghai housing market. This is done by creatively applying the sentiment index construction approach in the stock market to the housing market. The look-ahead-bias-free monthly index is highly correlated with official indexes about consumer and investor confidence. In-sample tests show that positive sentiment helps explain the lower returns in the future, although sentiment does not have out-of-sample forecasting ability. Furthermore, we find that loosening policies in the housing market tend to increase sentiment, while there is no evidence about sentiment drops related to tightening policies. And if a tightening policy meets with high sentiment, the housing prices will rebound after an initial drop. The rebounding is more obvious in sub-markets where housing prices tend to grow whenever sentiment increases but rarely drop when sentiment decreases. Finally, we use a simple model to illustrate why sentiment affects policy outcomes