Econ 345 Urban Economics
Literature Survey
Yuan (Ingrid) Zhuang
Feb. 7, 2013
Introduction
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 GDP1 and a quarter of total fixed asset investment (FAI) in 2011.2
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 marketoriented 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.
Literature Review
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.
1
Source: National Bureau of Statistics (NBS) of China.
Source: CEIC Data. Macroeconomic, Industry and Financial Time-Series Databases for Global Emerging
and Developed Markets.
2
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Econ 345 Urban Economics
Literature Survey
Yuan (Ingrid) Zhuang
Feb. 7, 2013
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 20083. 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
3
Source: China Population and Employment Statistical Yearbook 2009
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Econ 345 Urban Economics
Literature Survey
Yuan (Ingrid) Zhuang
Feb. 7, 2013
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
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Econ 345 Urban Economics
Literature Survey
Yuan (Ingrid) Zhuang
Feb. 7, 2013
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.
Appendix
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Econ 345 Urban Economics
Literature Survey
Yuan (Ingrid) Zhuang
Feb. 7, 2013
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Econ 345 Urban Economics
Literature Survey
Yuan (Ingrid) Zhuang
Feb. 7, 2013
References
Ding, Wenjie. 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. 16871.
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.
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