Land and Monetary Policy Reforms Can Help Fix Housing Supply Mismatches, Argues Ni Pengfei from CASS

Title: Monetary policy easing, mismatch of supply and demand space and differentiation of housing prices (货币政策宽松、供需空间错配与房价持续分化)
Journal: Economic Research Journal
Author: Ni Pengfei, Chinese Academy of Social Sciences (倪鹏飞)
Publication Date: August 2019

  • Using 2001-2013 housing data from 285 prefecture-level cities, CASS economist Ni Pengfei evaluates the effect that land and monetary policies have had on housing prices. Ni writes that, during the time period surveyed, housing prices in first- and second-tier cities have grown much more rapidly than housing prices in third- and fourth-tier cities.

  • Increasing urbanization, coupled with land and housing shortages in first- and second-tier cities have contributed to skyrocketing housing prices in those cities, Ni writes. During this time, upper-income residents, who tend to live in first- and second-tier cities, have also taken advantage of low-interest rates to finance mortgages for second homes and investment properties, further driving up housing prices (a phenomenon seen less often in third- and fourth-tier cities).

  • Meanwhile, in third- and fourth-tier cities, excessive land and housing supply has created significant housing inventory backlogs. Many development companies in these cities presently face high bankruptcy risk.

  • Ni notes these housing supply and demand mismatches can be addressed by adopting the following policies:

    • Implement land reforms. In first- and second-tier cities, relax land-development restrictions to increase available housing supply. In third- and fourth-tier cities, enact policies to restrict available land supply.

    • Establish a market-based “human-land linkage” system tied to an urban construction and land-availability index. Use this market-oriented mechanism to help local governments determine appropriate housing supply levels.

    • Avoid using short-term monetary policies to stimulate real estate development. Implement monetary policies that allow for differentiated interest rates that limit excessive flows of funds to the housing market.

    • Over the long term, implement monetary policy that differentiates real estate loan interest rates by city. Also give localities greater administrative control over taxation (localities presently do not have the power to set their own property tax rates, for example) and other housing issues according to local market conditions.

Note: Economic Research Journal is published by the government-affiliated Chinese Academy of Social Sciences (CASS). Ni Pengfei is a 2005 recipient of the Sun Yefang Award, China’s highest award in economics. He is director of the Center for Urban and Competitive Research at CASS.