Unintended Consequences of Demand-side Housing Policies: Evidence from Household Reallocation of Capital

Abstract

We empirically investigate how households allocate their funds in response to an austere housing-market cooling intervention—the Housing Purchase Restriction (HPR) policy in China—that depresses housing investment demand. Based on a proprietary dataset on individual stock accounts from a large stock brokerage firm, we find a significant increase in new stock accounts and capital inflow to the stock market by the affected households immediately after the HPR implementation, which absorbs 58.3% of the capital that would have flowed into the housing market. The affected investors more likely steer capital toward investment in the listed real estate developers, a pattern that is prevalent across investor demographics and particularly strong in HPR cities with higher pre-policy house price growth. The affected investors subsequently experienced significant trading losses, especially in real estate stocks. We also find listed real estate developers, compared with the non-listed real estate developers, increase their land purchases after HPR despite the negative demand outlook.

Keywords: housing market, housing demand, housing policies, expectation formation, extrapolative belief, stock market participation, investment choice, resource allocation

JEL Classification: R38; R21; G11; G41