SCHOOL OF HUMANITIES, ARTS, AND SOCIAL SCIENCES

DIVISION OF ECONOMICS

HE3013 URBAN ECONOMICS INDIVIDUAL PAPER

PREPARED FOR: Assistant Professor Walter Edgar Theseira

PREPARED BY: Chen Enjiao

DATE OF SUBMISSION: 27 February 2014

Contents
Abstract ................................................................................................................................................... 3 1. 2. 3. Context: The Worlds Largest (And Little Known) City.................................................................... 4 Theoretical Background: Classic Theory of Bid-Rent Curves .......................................................... 4 Data and Empirical Model............................................................................................................... 4 3.1 3.2 3.3 Summary Statistics .................................................................................................................. 6 Empirical Results & Interpretation.......................................................................................... 6 Limitations & Conclusion ........................................................................................................ 7

Bibliography ............................................................................................................................................ 8 Appendix 1 ............................................................................................................................................ 10 Choice of CBD.................................................................................................................................... 10 Appendix 2 ............................................................................................................................................ 13 Magnified Versions of Figure 1 and Figure 2 .................................................................................... 13

Abstract
This project seeks to estimate the relationship between housing price and distance to Central Business District (CBD) in the worlds largest city Chongqing. This is done by collecting data on the listing price of new residential units on a property website. A hedonic pricing model with 1-variable is then used to test the spatial trade-off in question. My results show that decreases the further a unit is away from the CBD, as predicted by Bid-Rent theory.

1. Context: The Worlds Largest (And Little Known) City

Despite being one of the fastest growing urban centres1 in the world boasting a population of 29.19 million as of 2011 (National Bureau of Statistics of China), little is known about the dynamics of housing prices in Chongqing. Despite the prevalence of hedonic pricing models in housing research, they are scarcely applied to Chinese cities (Chen & Hao, 2008), possibly because of issues with data availability2. This paper aims to study how housing prices vary with locational characteristics in Chongqing in light of such developments.

2. Theoretical Background: Classic Theory of Bid-Rent Curves

According to Bid-Rent theory, land valuation is based on the geographic distance from an established point of maximum value (Hanks, 2011), typically represented by the CBD3 (Fujita, 1989). Such a relationship has been verified in many instances (Alonso, A Theory of the Urban Land Market, 1960; Alonso, Location and Land Use, 1964; Muth, 1969; Mills, Studies in the structure of the urban economy, 1972; Mills, An Aggregative Model of Resource Allocation in a Metropolitan Area, 1967). In this traditional location theory, a spatial trade-off exists between housing prices and commuting costs4., i.e. households paying higher prices are compensated by the lower costs of commuting to the CBD and vice versa. I expect to see such a negative relationship5 in my empirical results.

3. Data and Empirical Model

Since no comprehensive dataset is available, I collect my data on 50 random housing units from Anjuke6, taking into consideration only new and unfurnished residential units for better comparability. Distance to CBD (indicated by the red circle in Figure 1)7 is then obtained from Baidu Maps8. All data is finally fed into Google Fusion Tables9 to generate the map below:

Annually, the size equivalent of Luxembourgs population enters Chongqing city in search of jobs (Watts, 2006). 2 The Chinese housing market has been freed for only about a decade. Previously, housing was allocated as a welfare benefit. Firms were ordered to provide highly subsidised housing to employees and priority access was given on the basis of rank and seniority. This only ceased with reform in 1998 (Chen & Hao, 2008). 3 This is due to the concentration of job opportunities in the CBD area according to the model. 4 Housing and accessibility to employment centres are jointly purchased so households attain spatial equilibrium by making trade-offs between accessibility and housing price. 5 To clarify, I am interested to investigate the negative relationship between housing price and commuting cost. When housing price is higher, commuting cost should be lower and vice versa. 6 The site http://cq.fang.anjuke.com/map/loupan/?from=navigation automatically generates 50 random units per visit. 7 Please refer to Appendix 1 for a detailed discussion on the choice of CBD in Chongqing. 8 Baidu Maps is accessible at http://map.baidu.com/, it is preferred to Google Maps because it offers the most updated transportation information as far as China is concerned. 9 Google Fusion Tables is accessible at http://www.google.com/drive/apps.html#fusiontables.

Source: Google Fusion Tables, 2013 Figure 1: A Geospatial Map of Housing Prices in Chongqing10 As can be seen, most purple and pink circles cluster around the red dot that is the CBD and the Yangtze, as we would expect. Figure 2 shows a scatter plot as well as line of best fit for my data. For magnified versions, refer to Appendix 2.

Figure 2: Scatter Plot and Line of Best Fit for Data Obtained
10

An interactive version of this map has been made available online at http://bit.ly/1lm1sJk, containing information on unit names and addresses.

The econometric equation in consideration is thus:

where CBD (in

is the housing price (measured in ).

) and

is the distance from

3.1 Summary Statistics

My sample consists of 50 listing prices. The mean housing price per square metre in the sample is $9340 with a standard deviation of $2228.
Variable HousePrice LnHousePrice Distance Obs 50 50 50 Mean 9339.76 3.957095 10.71 Std. Dev. 2228.211 .1128323 7.325501 Min 3200 3.50515 2.5 Max 15000 4.176091 40.4

Table 1: Summary Statistics

3.2 Empirical Results & Interpretation

Table 2 illustrates the Ordinary Least Squares estimates for the model. (1) Ln (HousePrice) -0.0121*** (-8.83) 4.087*** (230.17) N 50 t statistics in parentheses * p < 0.05, ** p < 0.01, *** p < 0.001 Table 2: Regression Results for 50 Housing Units in Chongqing City _cons The coefficient on is highly significant and shows that as distance to CBD increases by 1km, listing price decreases by 1.2%. In contrast to the 5% drop observed for Shanghai (Chen & Hao, 2008), this seems small. However, such a subtler effect might be due to my examination of individual unit instead of zonal-level data11. The negative relationship is as predicted. As time savings are capitalised in the value of property, housing prices increase with greater proximity to the CBD, reflecting the price premium people are willing to pay for convenience.

Distance to CBD

11

Though I had tried to gather data only for housing units that are as comparable as possible, there remains many individual dwelling characteristics that are not controlled for, which may render our results problematic.

3.3 Limitations & Conclusion

As mentioned at the outset, the lack of high quality and consistent data on housing prices in Chongqing may introduce measurement errors into this empirical exercise12, possibly giving us an inefficient estimator13. Such attenuation bias may partially explain the small coefficient on . Furthermore, a 1-varaible specification is extremely liable to suffer from the omitted variables bias, causing the problem of endogenity when the effects of other key variables are captured in 14. Our estimator may therefore be inconsistent. More fundamentally, the model implicitly assumes that the city is monocentric, but there exist 2 other CBDs in Chongqing which may conflate our results15. A better model may introduce location-time interacting dummy variables instead of making a priori assumptions about the location of CBD, as employed in this Hong Kong study (Yiu & Tam, 2004). Housing is often thought to be a basic right (United Nations) and an essential component of social security. In the context of rapidly rising housing prices in China, greater attention must be paid to the underlying dynamics in order to inform policy. It is hoped that this paper has provided an empirical verification of the Bid-Rent theory in the developing market of China and that more research in this underserved geography will continue. The urbanisation of millions of people is at stake.

12

Indeed, our small sample size may not be representative of the population of housing prices in Chongqing, leading to more noise and contributing to the attenuation bias aforementioned. 13 This assumes that the error(s) in measurement is uncorrelated with residuals. 14 For example, omission of the variable access to green space may exaggerate our OLS estimate. Other variables like listing time may warrant attention as well. 15 Suppose Unit A is 5km away from my chosen CBD but only 1km away from the Jiangbeizui CBD which is further up north, its housing value may be artificially higher due to its proximity to Jiangbeizui, therefore causing an underestimation of .

Bibliography
Alonso, W. (1960). A Theory of the Urban Land Market. Regional Science, 149-157. Alonso, W. (1964). Location and Land Use. Cambridge, MA: Harvard University Press. Anjuke. (n.d.). Anjuke. Retrieved February 25, 2013, from Chongqing Housing Unit Maps: http://cq.fang.anjuke.com/map/loupan/?from=navigation Baidu. (n.d.). Baidu Maps. Retrieved February 26, 2013, from http://map.baidu.com/ Chen, J., & Hao, Q. (2008). The impacts of distance to CBD on housing prices in Shanghai: a hedonic analysis. Journal of Chinese Economic and Business Studies, 292-302. Chinese Tourist Maps. (n.d.). Retrieved February 15, 2013, from Chongqing Districts Map: http://www.chinatouristmaps.com/provinces/chongqing.html Fujita, M. (1989). Urban Economic Theory: Land Use and City Size. Cambridge: Cambridge University Press. Google. (n.d.). Google Fusion Tables. Retrieved February 24, 2014, from http://www.google.com/drive/apps.html#fusiontables Google. (n.d.). Google Maps Engine. Retrieved February 15, 2013, from https://mapsengine.google.com/ Hanks, R. R. (2011). Encyclopedia of Geography Terms, Themes, and Concepts. Santa Barbara, California: ABC-CLIO. Mills, E. S. (1967). An Aggregative Model of Resource Allocation in a Metropolitan Area. The American Economic Review, 197-210. Mills, E. S. (1972). Studies in the structure of the urban economy. Baltimore: The Johns Hopkins Press. Muth, R. F. (1969). Cities and housing: the spatial pattern of urban residential land use. Chicago: University of Chicago Press. National Bureau of Statistics of China. (n.d.). National Bureau of Statistics of China. Retrieved February 12, 2013, from http://www.stats.gov.cn/ Taxi Auto Fare. (n.d.). Retrieved February 10, 2013, from Chongqing: http://www.taxiautofare.com/cn/taxi-fare-card/Chongqing-Taxi-fare United Nations. (n.d.). United Nations. Retrieved February 18, 2013, from The Universal Declaration of Human Rights: http://www.un.org/en/documents/udhr/ Watts, J. (2006, March 15). The Guardian. Retrieved February 21, 2014, from Invisible city: http://www.theguardian.com/world/2006/mar/15/china.china

Yiu, C., & Tam, C. (2004). The estimation of housing price gradients: A comparison of different approaches applied in Hong Kong. Adequate & Affordable Housing for All. Toronto: University of Toronto. ZenTech. (n.d.). Retrieved February 14, 2013, from Chongqing Map: http://www2m.biglobe.ne.jp/~ZenTech/English/Map/China/Chongqing.htm Zhang, Y. (2013, November 16). Chongqing News. Retrieved February 12, 2014, from CBD to be enlarged: http://english.cqnews.net/html/2013-11/16/content_28672965.htm

Appendix 1
Choice of CBD
The largest direct-controlled municipality in China, Chongqing is divided into 19 districts, 15 counties, and 4 autonomous counties. This really means that the Greater Chongqing Region looks like below:

Source: ZenTech, 2013 Figure 3: Map of the Greater Chongqing Region

Of which, the urban area of Chongqing city proper like this:

Source: Chinese Tourist Maps, 2013 Figure 4: District Map of Chongqing city

Source: Google Maps Engine, 2013 Figure 5: CBD Centres of Chongqing City

In particular, our CBD of interest is located in the Yuzhong Peninsula (, or "Central Chongqing District") where government and international business offices are located (Chinese Tourist Maps). The marker of this location is the green marker as above in Figure 5 where the Peoples Liberation Monument is. It stands in the Jiefangbei commercial square which is like Chongqings version of Times Square New York. It is the most established CBD to date while the other 2 (Danzishi and Jiangbeizui) are relatively recent developments (Zhang, 2013). Distance to CBD is therefore obtained by calculating the driving distance from a selected housing unit to the Peoples Liberation Monument. This warrants some explanation. First of all, Chongqing is a hilly city so walking distance is highly undesirable as a measure of choice (since people tend to avoid it altogether). Secondly, I assume that driving distance is a good measure since even if one does not own a car, cabs are cheap in Chongqing (Taxi Auto Fare) even after taking disposable income into account. Otherwise, driving distance is linearly related to traveling time by public transport as Chongqing has a well-developed network consisting of buses and metro. Therefore it remains the measure of choice.

Appendix 2
Magnified Versions of Figure 1 and Figure 2

Source: Google Fusion Tables, 2013 Figure : A Geospatial Map of Housing Prices in Chongqing

Figure

: Scatter Plot and Line of Best Fit for Data Obtained