Housing investment in urban China

Yujin Cao, Jidong Chen and Qinghua Zhang

Journal of Comparative Economics, 2018, vol. 46, issue 1, 212-247

Abstract: What explains the rapidly increasing housing investment demand in China? To address this question, we develop an analytical framework featuring how expected capital gains impact households' housing investment decisions when subject to financial constraints. Housing demand in China takes place not only through households' owning multiple houses, but also through their owning a larger primary living residence if they are constrained from buying multiple houses. We show that households are more likely to own multiple houses when expecting higher capital gains. As expected capital gain increases, the primary housing demand of those households who are constrained from owning multiple houses increases, while those owing multiple housing units invest in extra ones instead of improving primary housing. Our empirical findings, based on 2010 and 2011 household survey data, are consistent with our theoretical predictions. We also find that the marginal effect of expected capital gains is higher for wealthier households. This links the booming housing market to widening income inequality which is a typical growth pain in a developing country like China. As an extension, we apply the analysis to derive implications of the institutional features (such as purchasing restriction policy and the existence of subsidized housing) for China’s housing markets.

Keywords: Housing investment; Financial friction; Expected capital gains; Chinese housing market (search for similar items in EconPapers)
JEL-codes: O12 O18 R1 R21 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jcecon:v:46:y:2018:i:1:p:212-247

DOI: 10.1016/j.jce.2017.07.002

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