How a Short-Lived Rumor of Residential Redevelopment Disturbs a Local Housing Market: Evidence from Hangzhou, China

Abstract

This paper investigates how a short-lived rumor of residential redevelopment triggered herding trading and housing price overreactions in a local housing market in Hangzhou. Through event studies, we find that herding purchasing caused a short-term housing price overreaction. Simultaneously, existing homeowners became reluctant to sell, and the number of new listings for sale decreased temporarily. However, we find no evidence of a decrease in market efficiency. A herding investor who purchased an average home may have suffered a loss of CNY 593,907 after the rumor weakened, equivalent to 8.7 years of income for an average resident in Hangzhou in 2021. This study reveals the importance of government policy communication, and the detrimental impact of ambiguous urban renewal policies on housing market stability and wealth redistribution.

Keywords

• residential redevelopment
• housing price
• herding
• policy communication