The spillover effect and transmission mechanism of China real estate purchase and loan restriction policies in 2010

Abstract

This paper explores whether the purchase and loan restriction policies implemented in China real estate market around 2010 leads to spillover effects, and the specific transmission mechanism. This paper tests with the data from land transactions, urban economy, and real estate listed companies and a difference-in-differences model. The study found that, an increase in land prices and transaction volume in neighboring cities is caused by regulatory policies targeting the first-tier and second-tier key cities, showing significant spillover effects. Furthermore, non-state-owned companies are essential for the spillover effect, while companies with high inventory turnover rate, high leverage ratio, high growth, and a high proportion of land storage in cities with purchase restrictions before 2010 participate in the land market more actively, main driving the rise in real estate prices in cities surrounding the cities with purchase restrictions. These companies also accumulate huge risks for themselves while pushing up the housing price bubble in the surrounding cities. With the issuance of more stringent regulatory policies and the change of the overall economic environment, the real estate market has had a huge crisis after 2020. The bubble burst first occurred in the above third and fourth tier cities affected by the spillover effect, and the crisis also occurred mainly in the real estate companies that helped to form the bubble. This paper provides useful theoretical and empirical references for understanding the behaviors of the real estate market, the effectiveness of economic policies, and macroeconomic regulatory policies, indicating the profound impact of policy changes on competitive strategies of companies and market structure, and important guiding significance for future policy optimization.