Unintended consequences of price ceiling : evidence from the housing sector

Abstract

Housing-price fluctuations and widespread speculation in the market have drawn the attention of government, researchers, and the public. In 2016, as China’s housing market heated up, local governments took regulatory measures to curb the rapid rise in housing prices. In addition to measures such as purchase restrictions, loan limitations, and resale constraints, the government also introduced its strictest price-ceiling policy. Although the original intent of the price-ceiling policy was to curb speculative housing investments, it inevitably resulted in a significant price distortion, with prices for newly built housing appearing “stable” while resale housing prices continued to rise. Consequently, the prices of newly built houses were set far below those of resale houses in the same location, leading to the price-inversion phenomenon. With such a large price gap, price ceilings on newly built houses may fuel speculation instead of curbing it, prompting more investors to resort to any means necessary to buy a newly built house. This thesis attempts to identify the unintended consequences of price ceilings on the housing market and on demand, particularly whether it has stimulated speculative housing investments. This thesis systematically reviews the background, context, changes, and key regulatory aspects of China’s housing price-ceiling policy and provides a detailed analysis of the development process. Based on this foundation, this study compares the effects of price ceilings on the housing market through case studies, theory, and empirical evidence, with a focus on newly built and resale housing markets. First, to investigate how price ceilings influence homebuyers’ housing preferences, the study analyzes two representative case studies—Xiaofengyinyue, a price-ceiling complex with lottery-based allocations; and Liuxiangyuan, a no-price-ceiling complex—and compares the variations in buyers’ total housing-price selections at different purchase sequences under distinct policy environments. Second, a theoretical analysis examines the characteristics of housing investment and consumption demand and how these two demand types interact under the price-ceiling framework. Finally, building upon this theoretical foundation, the study employs an empirical approach to assess how price ceilings affect housing investment and consumption demand. Taking monthly micro-level listing data, a semi-parametric hedonic pricing model is constructed to quantify the degree of price inversion of newly built complexes in sample cities. Then, based on the micro-level transaction data from 29 newly built projects in Beijing, Hangzhou, and Ningbo, the study proves that as the degree of price inversion increases, housing investment demand becomes more pronounced, while consumption demand weakens, providing empirical evidence that price ceilings stimulate speculative housing purchases. Additionally, by analyzing occupancy rates in delivered housing complexes, the study finds housing complexes with higher price-inversion levels exhibit significantly lower occupancy rates, even when controlling for delivery time and decoration standards. This finding provides direct evidence of the unintended consequences of price ceilings in encouraging speculative investment. On the one hand, this thesis provides a novel approach to identifying speculative behavior in the housing market; on the other hand, by examining the policy’s effects from the perspective of homebuyers, it supplements existing research on the implementation outcomes of price-ceiling policy, filling gaps in the literature. Ultimately, this thesis contributes to the development of a long-term regulatory framework for housing-market stabilization. The key findings are as follows: (1) While price ceilings have temporarily slowed the rapid growth of the market for newly built housing, they have also imposed substantial negative effects on both the market and enterprises. Furthermore, their effectiveness in stabilizing resale housing prices remains limited. (2) Case-study analysis demonstrates price ceilings lead to newly built housing transaction prices being significantly lower than market expectations. As a result, in price-ceiling housing complexes, buyers with priority selection tend to choose higher-priced units, whereas this behavior is absent in no-price-ceiling complexes. (3) Theoretical analysis finds investment demand is not significantly correlated with demographic factors such as age or household registration (hukou) status. However, it is negatively correlated with the purchase sequences in price-ceiling projects, meaning that if investors secure the opportunity to purchase a “cheap” home, they are more likely to choose the most expensive unit to maximize returns. By contrast, consumption demand is positively correlated with demographic factors, indicating older buyers and those with local household registration are more inclined to purchase higher-priced residences for personal use. (4) Empirical analysis proves that as the degree of price gap between new and resale housing increases, investment demand becomes dominant, aligning with insights from the case study and theoretical analysis. It provides evidence that price ceilings result in increasing speculative housing purchases. (5) Empirical analysis also finds greater price inversion leads to lower occupancy rates in newly built housing complexes, even when controlling for delivery and renovation factors. This finding confirms price ceilings encourage speculative investment rather than deterring it. In sum, these results suggest price-ceiling policies have led to unexpected consequences. Although initially designed to suppress housing investment and alleviate supply–demand imbalances, they have, in practice, created significant arbitrage opportunities, thereby stimulating speculative activities and further distorting the market. The existing literature has not sufficiently explored the potential for price ceilings to promote housing speculation. This thesis thus provides valuable insights for policymakers considering the use of price ceilings as a regulatory tool.