Outsiders, Insiders and Interventions in the Housing Market

Abstract

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