Overreaction to policy changes in the housing market: Evidence from Shanghai

• The first repeat sales housing price index of Shanghai is constructed.
• The market has strong consumption incentives, and overreacts to policy changes.
• Downtown has more investment incentives and less overreaction than suburb.
• Most non-local buyers were driven by consumption incentives.
• Purchase restriction policies were not followed by decreased investment incentives.

With the data of housing transaction records of Shanghai during 2004–2015, this paper comprehensively analyzes the housing market in this metropolis, and pays special attention to the market dynamics related to the frequent policy changes. We focus on the secondary market, and build repeat sales indexes. Then the AR(1)–GARCH(1,1) model is applied to estimate the weight of housing consumption incentives relative to investment incentives. It turns out that the overall market features strong consumption incentives, especially in the suburb area. Moreover, the market tends to overreact to policy changes. Compared with the suburb area, downtown features more investment incentives, lower returns and volatility, and less overreaction to policy changes. We infer that long-term investors overreact less than consumers. Finally, the purchase restriction policy and the issue of non-local buyers are discussed.