by Ingrid Zhuang ZHUANG_INGRID_2013_Lit_Survey_Revised
China’s rapid economic growth has fueled a housing market boom for more than a decade. Property market amounts to a large sector in the Chinese economy, with real estate investment accounting for 13 % of China’s GDP and a quarter of total fixed asset investment (FAI) in 2011. China’s real estate market is primarily driven by population growth, urbanization, and government interventions. Although China is transitioning from a planned socialist economy to a market-oriented economy, the central government continues to intervene the housing market on a regular basis. Therefore, as the country rises in importance in global economic growth, policy makers, investors, and scholars demand a better understanding of the government interventions’ impact on China’s booming housing market.
There are many academic papers that explore monetary and fiscal policies’ impact on the property market. Most studies focus on the supply-side interventions, which result in rising demand and housing prices. In the United States, such regulations include land-use restrictions and other zoning rules, whereas in China, a stimulus package is employed to spur real estate investment and house-ownership. Few studies have been done on the demand-side regulations since, beginning in April 2010, the Chinese government suddenly and for the first time changed direction from a period of encouraging home purchase and real estate investment to cooling the housing market. In this brief literature review, I follow the literature on Chinese housing market in a chronological order, with specific focus on housing price movement influenced by macro trends and the recent policy change. I will first discuss literature surrounding the macro-factors (urbanization and migration) that led to the booming Chinese housing market, particularly relevant to major cities such as Beijing. Next, it is important to examine the research that has been done on the Chinese expansionary policy and study its effect on housing prices. Lastly, I will review a working paper that analyzes the new housing regulation, in order to shed light on my research of the policy’s impact on housing demand and prices, using Beijing as a study case.
Since the economic reform of 1978, China’s urbanization started to pick up its pace, the urban population grew from 185 million to 607 million and the urbanization rate increased from 19.0% in 1979 to 45.7% in 2008. Major cities are going through dramatic expansion in conjunction with the transition to a market economy. As more and more workers migrate from rural areas to cities, housing policy becomes an important issue that demands extensive research. There are many comprehensive discussions on the formation and development of the Chinese housing market, such as Zheng and Kahn (2007), Deng et al. (2011), and Ding (2012) among many.
Zheng and Kahn (2007) choose Beijing as the focus of their research. Using two geocoded data sets, they present new evidence on Beijing’s recent free real estate market, including housing price gradient, land price gradient, population densities, and building densities. They conclude that the monocentric model predictions are largely upheld in Beijing: land and property prices decline with distance from the Central Business District (CBD), as does population density. Additionally, they find that local public goods, such as clean air, access to public transportations, and proximity to high-quality schools, are significantly capitalized into real estate prices (2007). Although much has changed in Beijing since 2007, the monocentric model presented by Zheng and Kahn (2007) still holds. As urban population growth continues to exert great pressure on the city’s already overloaded infrastructure, the urban fringe is quickly expanding and being converted from agricultural to urban uses. After new infrastructure took form for the 2008 Summer Olympics, Beijing’s city congestion and air pollution problems became increasingly pressing. A large percentage of residents, especially families with children, who used to live near the city center, begin to move towards the outskirts of the city, substituting rising transportation costs for a better living environment.
Having reviewed the general macro-trends of urbanization and the housing boom, it is important to fit the Chinese government’s interventions into the framework and examine the impact on housing demand and prices. Since the central government issued the stimulus package in November 2008, China’s real GDP boosted an annualized 5.7% (from 6.2% to 11.9%) from 2009 to 2010, as reported in Deng et al. (2011). Amidst this phenomenal response, real estate market in major cities boomed exponentially, with housing prices soaring. Deng et al. (2011) is a comprehensive research that analyzes how 2008 monetary and fiscal stimuli have affected the housing prices in major Chinese cities. Employing land parcel auction data from eight major Chinese cities, Deng et al. (2011) uses a pooled hedonic land pricing model estimated by OLS, a sandwich estimator allowing for clustering by city, and random effect regression. The dependent variable in the model is “the transaction price for each parcel in the logarithmic form measured as the price per square meter of the permitted housing floor space” (2011). The results show that residential land auction prices in eight major cities rose about 100% in 2009, controlling for quality variation (2011). Therefore Deng et al. argue that much of the stimulus investment involved highly leveraged purchases of real estate, which benefited the centrally controlled state-owned enterprises (SOEs), fueling a real estate bubble. The model in Deng et al. (2011) is relevant to my research, as I will be using Beijing’s land parcel and residential housing transaction data to examine the housing price movement following the policy reversal in 2010.
Since the end of 2008, the government’s expansionary package has led to an unsustainable housing boom with the housing prices rising at an astonishing rate. Many studies have suggested that a credit expansion in such a large scale encouraged not only home purchases for consumption use, but also home investment by speculators (Ding, 2012). On April 17, 2010, the central government announced a new Chinese housing policy, known as the State Council “Document Number 10”. The specifics of the “Document Number 10” include: the minimum down payment ratio for second-home purchases was raised from 40% to 50%, and non-residents can no longer obtain mortgages to buy homes in a city unless they have paid taxes in that city for at least a year (see Figure 1, Ding, 2012). Clearly, the new housing policy’s aim is to curb excessive growth in housing prices and to tame housing speculations, with a central focus on tightening mortgage supply for housing speculators.
Researches dealing with the Chinese new housing policy are very limited. Wenjie Ding’s “Evaluating Housing Policy Interventions in China: Using Stock Market Data (2012)” is one among the few working papers. Ding’s work is a comprehensive event study that analyzes the new Chinese housing policy’s immediate impact on publicly traded real estate firms when the policy was first announced on April 17, 2010. Given a lack of appropriate and reliable data, Ding proposes a different strategy in approaching her research question. She collects high frequency financial market data from all publicly traded real estate firms on the Hong Kong Stock Exchange (HKEx), the Shanghai Stock Exchange (SSE), and the Shenzhen Stock Exchange (SZSE), and employs a multivariate regression in which abnormal return is parameterized in an individual stock return equation (2012). Ding detects “cumulative abnormal returns of about -15%, which is consistent with a 2%-4% decline in average house price across the nation. In major markets with inelastic supply, such as Beijing, equilibrium house prices are expected to decline by as much as 6%-10% with a 10 percentage point increase in required minimum down payments for housing speculators” (see figure 4, 2012). Taking into consideration of possible pre-trends bias, Ding extends the event window to 20 trading days before the policy announcement date and uses baseline estimates and other test of robustness to lend support to the estimated impact.
The results of Ding’s event study statistically attest to the intention of the “Document Number 10”. Ding concludes that the new housing policy to curb housing price growth results in negative stock returns for real estate firms. She finds that real estate firms with a diversified portfolio are hedged against housing-specific policy risks, while firms with an affiliation with the central government suffer greater downturns as the government withdraws its support. My proposed research focuses specifically on Beijing’s housing price movement, and will contribute to the existing literature as empirical evidence of the endogenous effects of the “Document Number 10”. Ding’s study is limited to the negative shock after the first announcement of the “Document 10” in April 2010, and ignored the impacts of subsequent amendments in late 2010, and 2011. Instead of using data from all publicly traded real estate firms in China, I will gather Beijing’s individual house purchasing transaction data post 2008, and present Beijing’s real estate market as a case study in analyzing the new policy’s effect on housing prices. With all the background information in mind, I will proceed to present my model in the following section.
2012. “Evaluating Housing Policy Interventions in China: Using Stock Market Data.” Job Market Paper. The Wharton School, University of Pennsylvania.
Deng, Yongheng, Randall Morck, Jing Wu, and Bernard Yeung.
2011. “Monetary and Fiscal Stimuli, Ownership Structure, and China’s Housing Market.” National Bureau of Economic Research. NBER Working Paper No.
Kahn, Matthew E., and Siqi Q. Zheng.
2007. “Land and Residential Property Markets in a Booming Economy: New Evidence from Beijing,” Journal of Urban Economics.