How did the fiscal and exchange rate reform affect housing prices in China?

Abstract

Besides socio-economic factors, we propose that two major policy changes have unintended consequences on the regional disparity in housing prices in China. First, income from land sales has become a major source of discretionary revenue for local governments in China since the fiscal reform in 1994. The local governments that rely more on land sales revenue have an incentive to sustain a booming housing market, which may at times in conflict with the central government's policy of improving housing affordability to maintain social stability. Our provincial level data suggest that housing prices increased as a faster rate for provinces with a larger proportion of their revenue from land sales, ceteris paribus. Second, the RMB reform started in 2005 has caused an influx of hot money into China to earn an almost risk free return from the anticipated planned graduate appreciation of RMB. Some of this hot money found its way into the housing market causing a housing price boom. However, since the hot money needed an exit strategy, we conjecture that that they tend to concentrate in areas with a more well-developed tertiary sector, which increased housing price gap between the rich and poor regions. Our empirical results are consistent with this conjecture.