Public Services, Real Estate Taxes and Fees, and Housing Prices in China: A Study Based on Chinese-Style Decentralization

Abstract

In this research, we extend the work of Stadelmann and Billon (2012) by incorporating Chinese-style decentralization variables. We do this to explore the characteristics of tax capitalization and the capitalization of public services under the city governances in China. As an indicator of Chinese-style decentralization, the city-level administrative hierarchy leads to city-level differentiation of fiscal resources and public services. We argue that this further causes a huge disparity in housing prices among China’s 35 major cities. Meanwhile, the land transferring fee is a factor driving the increase in urban housing prices. The main contributions of this research are fourfold. One, we provide a reasonable explanation for the structural intercity housing price differences in China’s 35 major cities. Two, we use the method of principal component analysis (PCA) to calculate the 35 major cities’ public services indexes. Three, we use measures of land-related taxes and land transferring fees to check the effects of tax capitalization. Four, we use the number of city-level government officials at the deputy bureau chief and above levels for the first time as an instrumental variable and an indicator for Chinese-style city-level decentralization to help mitigate the endogeneity in the panel data analysis.

Keywords: Chinese-Style Decentralization; Public Services Capitalization; Tax Capitalization; Intercity Housing Price Differences; Administrative Levels; Principal Component Analysis