Outsiders, Insiders and Interventions in the Housing Market
46 Pages Posted: 22 Aug 2019 Last revised: 2 Mar 2021
Date Written: July 20, 2020
In the wake of China's "great migration," many cities, including Beijing and Shanghai, restrict some residents from owning housing, forcing them to rent. We build a model studying motivations for and effects of ownership-restricting policies. When some agents are prohibited from purchasing housing, competitive equilibrium further punishes renters, failing to attain a "second-best" that maximizes welfare subject to the policy's intended constraint. We then consider real estate taxation, a hotly debated topic in China, currently undergoing reform. We show that positive taxes on housing transactions can help mitigate the inefficiency caused by restricted ownership, but only by introducing a new distortion. Meanwhile, subsidizing rental transactions could, in theory, restore the second-best, but only by diverting public funds away from other uses.
Keywords: Ownership Restriction, Sale versus Rental, Taxation, Chinese Housing, Hukou, Second-Best
JEL Classification: D41, D45, H21, H30
Suggested Citation: Suggested Citation