Unintended Consequences of Demand-Side Housing Policies: Evidence from Capital Reallocation
58 Pages Posted: 15 Apr 2020
Date Written: March 21, 2020
We empirically investigate how households reallocate their funds in response to an austere housing-market cooling intervention—the Housing Purchase Restriction (HPR) policy in China—that depresses housing 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 opening and capital inflow to the stock market by the affected households immediately after the HPR implementation, which absorbs 54% 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 a higher pre-policy house price growth. The capital reallocation results in a significant trading loss for affected investors. We also find listed real estate developers, even the capital-constrained and more HPR-exposed firms, do not reduce corporate investment and employment 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
Suggested Citation: Suggested Citation