Are Pricier Houses Less Risky? Evidence from China
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Are Pricier Houses Less Risky? Evidence from China Jianhua Gang 1 & Liang Peng 2
& Jinfan
Zhang 3
# Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Houses are the largest component of most households’ wealth and their risk is important. Recent research shows that pricier houses have lower price appreciation risk. This relationship can be due to competing reasons: risk is related to the price level, or risk is related to location-related features that are reflected in prices. This paper disentangles these two relationships by analyzing condo data from China with a special feature: Condos in the same subdivision have identical location but different prices. Our results indicate that larger and pricier condos are less risky than smaller ones in the same location. Furthermore, for condos with the same size, those with higher price per square meter are less risky. These results seem to indicate that pricier houses are less risky not due to location-related features that are reflected in prices. Keywords Housing . Risk segmentation JEL Classification G12 . R33
Introduction Houses are the largest asset owned by most households (see, e.g. Chetty et al. (2017)), and play an important role in the economy, as manifested in the recent financial crisis
* Jianhua Gang [email protected] Liang Peng [email protected] Jinfan Zhang [email protected]
1
School of Finance, Renmin University of China, Beijing 100872, China
2
Smeal College of Business, The Pennsylvania State University, University Park, PA 16802, USA
3
School of Management and Economics, Chinese University of Hong Kong (Shenzhen), Shenzhen 518172, China
J. Gang et al.
(see, e.g. Goetzmann et al. (2012) among many others). Therefore, understanding their risk is important for homeowners, mortgage lenders, MBS issuers and investors, and policy makers. Using U.S. housing data, recent research provides strong evidence suggesting that housing risk, measured in many different ways, may vary across submarkets and individual houses, and seems to be related to local social-economic characteristics and houses’ attributes. This is a fundamentally important finding, suggesting that different houses can be essentially very different assets in the sense that they have different risk and return characteristics. Particularly, a series of papers provide evidence suggesting that housing risk may be related to house prices. Specifically, Ambrose et al. (2001) and Zhou and Haurin (2010) use aggregate data to find that house prices at both the high end and the low end of the price distribution are more volatile than prices in the middle of the distribution. Peng and Zhang (2019) study individual houses’ price appreciation rates, and find that pricier houses have lower stock market betas. A few other recent papers provide strong evidence that housing risk might vary with household income at the zip-code level. Since house prices tend to be higher in zip codes with higher household income, these papers hint that housing risk is related to house p
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