Academic journal article The Journal of Real Estate Research

The Estimation and Determinants of the Price Elasticity of Housing Supply: Evidence from China

Academic journal article The Journal of Real Estate Research

The Estimation and Determinants of the Price Elasticity of Housing Supply: Evidence from China

Article excerpt

Abstract This paper provides a first look at estimates of the price elasticity of the housing supply in China at both the national and city levels. Using a panel dataset consisting of 35 cities in China from 1998 to 2009, the findings show that the implied national price elasticity of housing supply is between 2.8 and 5.6. The city-level analysis reveals that geographic, economic as well as regulatory factors are significant determinants of the variation in the observed price elasticity of housing supply. The study of a different regulatory and economic environment contributes to the growing literature on supply elasticity and helps explain the seemingly wide variation in supply elasticities observed across cities and countries.

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The rapid growth in housing prices in many cities around the world since the late 1990s has motivated a growing number of studies (Jud and Winkler, 2002; Glaeser, Gyourko, and Saiz, 2008; Goodman and Thibodeau, 2008; Wheaton and Nechayev, 2008; and Shi, Young, and Hargreaves, 2010) to examine the variation in housing price dynamics across cities or regions. Although strong economic growth and intensified housing financial support along with other demand-side factors may have played a role in the recent run-up in housing prices, these demand-side factors alone are insufficient to capture the variations in the regional price dynamics. Hence, an increasing number of supply-side studies have started to surface to shed light on the role housing supply plays in housing price dynamics.

One focus of such housing supply studies is on estimating the price elasticity of housing supply, a parameter that measures the responsiveness of housing supply to a change in housing price. This parameter is important for housing market and policy analyses as it has implications to the relation between house price fluctuations and demand shocks. The magnitude of housing price changes as well as the time taken to restore a new level of price equilibrium due to an unexpected shock in housing demand are greatly affected by the price elasticity of housing supply. Prior studies used different models to analyze data at the national or city level over selected time periods, finding a wide range of empirical estimates of this supply parameter. However, there is yet to be a consensus on the method to estimate the price elasticity of housing supply. In addition, the bulk of the evidence focuses on the housing market in the United States, with only limited evidence on non-U.S. markets.

In general, the literature on supply elasticity addresses two related research questions. The first concerns the extent to which supply elasticity impacts housing price dynamics. Prior studies on this issue (Wheaton, 2005; Glaeser, Gyourko, and Saks, 2008; and Grimes and Aitken, 2010) generally confirm an inverse relationship, that is, a more elastically supplied housing market tends to have lower price levels as well as smaller price volatilities than a market with less elastic supply. The second question concerns the sources of variation in the estimated price elasticity of housing supply across different countries (Mayo and Sheppard, 1996; Malpezzi and Mayo, 1997; Malpezzi and Maclennan, 2001; and Vermeulen and Rouwendal, 2007) or different cities/regions within a country (Harter-Dreiman, 2004; and Green, Malpezzi, and Mayo, 2005). However, while some of the papers include one or two factors (regulatory, economic, and geographic) in their analyses, none of them analyzed all the three factors simultaneously.

The aim of this study is twofold. First, it seeks to estimate an aggregate or nationwide price elasticity of the housing supply in China to throw light on the comparative responsiveness of the housing supply in China relative to other countries. Second, it seeks to estimate the price elasticity of the housing supply at the city-level as well as identify the key determinants of variations in housing supply responsiveness across cities/regions in China. …

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