Urban air pollution and systemic risk of the real estate market in China

Air pollution is a major environmental risk to the economy nowadays. Given that urban air pollution is one of the determinants of urban housing price, and that both urban air pollution and housing price have significant spatial spillover effects, this paper explores the impact of inter-city air pollution spillover on systemic risk of the real estate market, using housing price data of 79 cities in 8 major urban agglomerations in China. This paper innovatively introduces the principal component analysis into the VAR model and appropriately conducts historical decomposition to construct a new systemic risk measurement index of the real estate market, which can identify both direction and magnitude of the impact. The results show that, on the time dimension, air pollution is found to contribute most time when systemic risk of the real estate market reaches a high level. On the spatial dimension, this paper identifies the urban agglomerations and node cities whose systemic risks of the corresponding real estate markets are more susceptible to air pollution spillover. On the spillover channels, this paper finds that the past cultivation of environmental awareness and the implementation of environmental protection policies in China have alleviated the negative impact of air pollution spillover on the systemic risk of the real estate market.