How does sentiment affect returns of urban housing?

Many urbanized housing markets have been overheating over the last two decades, particularly in China. However, little is known about how sentiment affects housing returns, during the dynamic process of urbanization. With this in mind, this study aims to investigate the dynamic effect of sentiment on housing returns in one of the most important urbanized cities in China, i.e. Shanghai. The study creates the buyer-seller sentiment and developer sentiment indexes using principal components analysis, followed by implementing a lag-property return model and VAR model. Evidence suggest that overall the impact of buyer-seller sentiment on housing returns is negative, while that of developer sentiment is positive. Yet interestingly, the influence of sentiment marked a noticeable change within the period under study. Before 2009, both types of sentiment had a positive effect on housing returns in the short run. After that, a higher developer sentiment drove up returns, but a higher buyer-seller sentiment had a low return. This study offers meaningful implications for policy makers in cooling down not only the housing scene of the urbanized city, but also sheds light on other urbanized housing markets globally. More importantly, it contributes to a sustainable urbanization and economic development, while providing home buyers and developers with practical suggestions.