China is undergoing a rapid pace of urbanization, with massive relocation of labor from rural agricultural to urban sectors, and also from interior provinces to the coastal region.This large scale labor mobility was enabled by the urban housing and job market liberalization in the late 1990s. Th e increased mobility in the labor market allows land rent to converge to its long-run equilibrium level determined by city productivity and local quality of living. In this paper we present the first study on how house prices across Chinese cities are influenced by the urban amenity characteristics, and how house prices adjust to clear the urban labor markets. We show that the equilibrium housing price net of wage rate is higher in cities with positive amenities, such as moderate climate, per capita green space, number of hospitals per 10,000 people, number of schools per 10,000 people, average years of schooling,but is lower in cities with high negative amenities, such as SO2 emission per sq. Km. During our study period of 1998 to 2004, most of the urban amenities were undervalued, and the housing price was away from its long-run equilibrium level. The more integrated labor market is pushing housing price to converge to that equilibrium level. These findings of the increasing influence of urban quality of living on cross-city land rents are clear indication thaturban residents really value the quality of living. It also shows that the labor markets in Chinese cities have become much more integrated.
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