Impact of urban economic openness on real estate prices: Evidence from thirty-five cities in China

Over the past decade, China's major cities have experienced significant real estate price increase which has been fueled by the sustained growth of the economic fundamentals. It is well believed that deeper integration with the world market is one of the major reasons for such high speed macroeconomic growth. In this paper, we examined the linkage between urban economic openness, the ratio of trade volume as a percentage of GDP, and urban real estate prices basing on the quality of life theory as well as Balassa-Samuelson (B-S) effects. Using panel data of 35 large Chinese cities from the year 1998 to 2006, we empirically find that for every 1% increase in urban economic openness, urban real estate prices will increase significantly by 0.282%, after controlling for other traditional demand-supply factors. Urban economic openness alone accounted for about 15.90% appreciations of Chinese real estate prices during the sample period, which is not neglectable. This result implies that urban real estate price fluctuations are potentially affected by international economic factors. The economic distance to the international market could be deemed as productive and consumption amenity for a city as well. This study enriches the perception of quality of life factors, and furthermore provides a new perspective for understanding the real estate price dynamics in the globalized economic development today.

Research Highlights► Economically more 'open' city has larger positive real estate price premium. ► Quality of life channel and Balassa-Samuelson channel simultaneously explain the transmission mechanism. ► The relative importance of the two channels is determined by the real labour mobility. ► 1% increase in urban economic openness leads to 0.282% increase in real estate price. ► Urban economic openness accounted for 15.90% of real estate price appreciation in China.