Does local governments’ budget deficit push up housing prices in China? |
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| Institution: | 1. Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, 14 Nanyang Drive, Singapore 637332, Singapore;2. Institute of Real Estate Studies, National University of Singapore, Singapore;1. Department of Economics, Chinese University of Hongkong, Shatin, N.T., Hong Kong;2. School of Economics, China Center for Economics Studies, Fudan University, 600 Guoquan Road, Shanghai 200433, China;1. National Center for Smart Growth & Urban Studies and Planning Program, University of Maryland, College Park, MD 20742, United States;2. Capital University of Economics and Business, Beijing, PR China;3. International School of Economics and Management, Capital University of Economics and Business, Beijing, PR China;4. Department of Agricultural and Resource Economics, University of Maryland, College Park, United States;1. Department of Economics, Shanghai Jiaotong University, Shanghai 200052, China;2. Department of Economics, Fudan University, Shanghai 200433, China;1. HKUST Jockey Club Institute for Advanced Study, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong;2. Department of Economics and Finance, City University of Hong Kong, Tat Chee Avenue, Kowloon Tong, Hong Kong;3. China Merchants Group, 37th floor, Shun Tak Centre, 168-200 Connaught Rd. C., Hong Kong;4. University of International Business and Economics, School of Finance, Beijing, China |
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| Abstract: | Budget deficit has been a common fiscal pressure facing Chinese cities since the 1994 fiscal reform. Meanwhile, land lease sales have become a significant off-budgetary revenue to local governments since 2003. This paper investigates whether financing budget deficit is an important driving force of the recent soaring housing prices when local governments function as the monopoly supplier of urban land. A conceptual framework is developed to illustrate a transmission mechanism from budget deficit to housing prices. This leads to an empirical model consisting of two simultaneous structural equations for housing prices and land prices. Using data for the 35 major Chinese cities from 2003 to 2011, an empirical exercise shows that although budget deficit has a positive effect on land prices, it is the factors from demand side, such as amenities, income and the user cost of housing capital, that have been pulling up the housing prices. |
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