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AbstractWe revisit the determinants of house prices in China's megacities. Previous work on similar topics fails to account for the widespread cross‐sectional heterogeneity and interdependencies, despite the importance of them. Using a PVAR estimated by the Bayesian method allowing for these features, we find each city is rather unique, especially on the extent to which local house prices are disturbed by external house price shocks. The spillovers may be partly related to the demand side before 2010, but seems more related to supply factors thereafter, due to the imposition of property purchase restrictions. The new evidence we establish therefore suggests that city‐level stabilisation of house prices should fully respect local features, including how local markets respond to external disturbances.

A canonical DSGE model for housing, extended to embrace government spending and governmentinvestment, is estimated on Chinese data to evaluate the impact of Öscal policy on house prices. Govern-ment spending substitutes for housing; a rise in government spending lowers house prices, but its impactis weak. Government investment generates a wealth e§ect, causing housing demand, and therefore prices,to rise; its variation had a substantial impact on the boom-bust cycles of house prices in the past decade.Both government spending and government investment are e§ective instruments for manipulating output.However, their di§erent impacts on house prices would recommend policies to count more on spendingif Öscal expansion is not to sacriÖce the stability of house prices.