This paper was prepared for the Reserve Bank of Australia and Bank for International Settlements conference on “Property Markets and Financial Stability” in August of 2012. We appreciate the comments of Haibin Zhu and other conference participants on an earlier draft, and gratefully acknowledge Jia He and Mingying Xu for excellent research assistance. Gyourko thanks the Global Research Initiatives Project of the Wharton School, University of Pennsylvania for financial support. Deng and Wu thank the Institute of Real Estate Studies at National University of Singapore for financial support. Wu also thanks the National Natural Science Foundation of China for financial support (No. 71003060). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. We provide the first multi-city, constant quality land price index for 35 major markets in China. While there is meaningful heterogeneity in land price growth across cities, on average the last nine years have seen land values skyrocket in many markets, not just those on or near the coast. The typical market has experienced double-digit compound average annual growth in real, constant-quality land values. The 2009-2010 stimulus period typically saw large surges in prices. Three notable characteristics about the land value appreciation series are their strong mean reversion at annual frequencies, the strong common factor in their movement, and their very high volatility. Quantities, not just prices, have been sharply increasing in recent years. The typical amount of space supplied via land auctions in our 35 city sample has doubled since 2008. Some local political economy traits such as the time the local Chinese Communist Party leader has been in office are correlated with land supply volume. We also investigate the quality of the two most prominent house price indexes in China, and conclude that a traditional hedonic index more accurately reflects how house prices have changed over time in eight major markets in China. Repeat sales indexes have become standard in many countries, but they are not as useful in emerging markets such as China because the bulk of the housing stock is relatively new and has not traded multiple times. A hedonic index shows much higher house price growth over time that do officially published series for the eight markets examined.

The stability of residential property markets has become an important topic for policy makers and scholars ever since the collapse of the subprime mortgage market in the United States helped precipitate the largest economic crisis seen in that country since the Great Depression. Many commentators now are raising questions about the stability of house prices in China given its extraordinary boom in values and its growing share of global growth. In this paper, we take a closer look at the Chinese housing markets, investigating two of their features in detail. One is the land market. China is virtually unique globally in that transactions prices of vacant land are regularly observed. We construct constant quality land price indexes for 35 major cities and analyze their characteristics. The other aspect of the housing market studied here is how best to measure price appreciation. Without an accurate gauge of real, constant quality prices, neither investors nor policy makers can be well-informed about the true condition of the property markets. Ever since Case and Shiller (1987) popularized repeat sales price indexes in the United States, they have become the gold standard for house price measurement, replacing the older hedonic techniques that were used to adjust for quality drift in the housing stock. However, China, along with many emerging markets, provides a unique challenge to the use of repeat sales indexes because there is plentiful new construction but few cases of multiple sales of existing units. Drawing on the work of Wu, Deng and Liu (2011).