Market sentiment in private housing market

•This paper develops a novel index to capture the market sentiment in private housing market.•The index can portray the household behavior and market performance to exhibit some implications.•The construction of index also can be extended and applied to other markets.•It shows sentiment index is an efficient predictor of price level, return rate and trading volume.•The equilibrium equations shows sentiment remarks the significant role in long-run development in housing market.

Housing demands are partially driven by participant's sentiment, but the literature on housing economics rarely acknowledges that fact. This paper aims to investigate the role of market sentiment in housing market. A sentiment index is developed to capture the aggregate investor behavior and thus market scenario. In empirical application, using elaborate transaction records during 1991–2011 (more than two million registrations) in Hong Kong, the sentiment index is established. Generally, investors in housing market are more likely to be sentiment-influenced. In trading process, a delaying effect on the expected waiting time (duration) from buy to sell is found. Furthermore, market sentiment quantified by sentiment index is an efficient predictor of price level, return rate of price and trading volume. Meanwhile, sentiment remarks the significant role in long-run development of housing market. The approach and implications of this study may serve as a reference for the relevant authorities to stabilize and improve the environment of housing market.