Government Land Regulations and Housing Supply Elasticity in Urban China

• Published date: 01 July 2022
• Author: Wenbin Huang
• Date: 01 July 2022
• DOI: http://doi.org/10.1111/cwe.12430

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 122–148, Vol. 30, No. 4, 2022

122

*Wenbin Huang, Post-doctoral Researcher, Lingnan College, Sun Yat-sen University, China. E-mail:

huangwb58@mail.sysu.edu.cn.

Government Land Regulations and

Housing Supply Elasticity in Urban China

Wenbin Huang*

Abstract

This paper studies the effects of government land regulations (GLR) on housing supply

elasticity in urban China. We first extend the theoretical framework of Saiz (2010),

then use land transaction microdata, satellite-generated data, and the construction of

instrumental variables to analyze the marginal effect of GLR, and fi nally calculate the

housing supply elasticity caused by GLR. Our analysis fi nds that GLR is an important

reason for the overall inelasticity of housing supply in 272 Chinese cities, which reduces

housing supply elasticity from 1.457 (elastic) to 0.872 (inelastic). Housing supply

elasticity caused by GLR has declined the most in fi rst-tier cities and the eastern regions.

The marginal effect of land use regulation is greater than that of land allocation and

supply regulations. The initial development level and natural geographic constraint of

each city also matter in China’s housing supply market.

Keywords: China, housing supply elasticity, land allocation regulation, land supply

regulation, land use regulation

JEL codes: C24, R31, R38

I. Introduction

The determinants of housing supply elasticity are crucial for explaining the current

global trend of rising house prices (Glaeser et al., 2006). A considerable body of

literature focuses on the effect of government regulations (e.g., land use regulation)

on housing supply and housing prices in various countries (Gyourko and Molloy,

2015; Molloy, 2020; Osman, 2020). In many countries around the world, the use of

regulations on housing supply is a common government behavior, which is usually

driven by common political incentives, such as protecting the interests of local residents

and rising government “fi scal profi t” (Bhavnani and Lacina, 2017; Glaeser et al., 2017;

Liang et al., 2020).

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Government Land Regulations and Housing Supply Elasticity 123

There are differences in regulations on housing supply in different countries.

Many countries only have land use regulations, like the US (Saiz, 2010; Hsieh and

Moretti, 2019), and some countries include land use, allocation, and supply regulations,

like China (Huang and Wang, 2021). First, the Chinese central government unevenly

distributes the national land supply quotas to provinces every year (i.e., land supply

regulation). Second, local governments allocate land quotas to residential, industrial,

commercial, and other uses (i.e., land allocation regulation). Lastly, local governments

also impose restrictions on each piece of residential land use (i.e., land use regulation).

This leads to several questions. Which kind of government land regulation (GLR) has a

greater marginal effect on housing price and housing supply elasticity? To what extent

do the three kinds of GLR reduce housing supply elasticity in urban China?

To answer the above questions, we construct a single-center city model by

extending the framework of Saiz (2010), which includes land use, allocation, and supply

regulations. In the theoretical model, housing supply elasticity is estimated by the

identifi cation of exogenous demand shocks. In the empirical design, we use satellite-

generated data and land-transaction microdata to measure three kinds of GLR and

natural geographic constraints in 272 Chinese cities. We also set up econometric models

and construct several instrumental variables (IVs) to solve endogeneity problems. Based

on the estimated results, we measure the housing supply elasticity of 272 cities and

analyze the change in housing supply elasticity caused by GLR.

Our research yields the following key fi ndings. First, GLR has a positive effect on

housing prices and a negative effect on housing supply elasticity. The marginal effect

of land use regulation is greater than that of land supply and allocation regulations.

Second, after controlling GLR, the overall level of housing supply elasticity in 272 cities

decreases from 1.457 (elastic) to 0.872 (inelastic), a decrease of more than 40 percent.

Third, housing supply elasticity caused by GLR has declined the most in fi rst-tier cities

and the eastern region. Finally, the initial development level and natural geographic

constraints of the city also matter in China’s housing supply market.

In the existing literature, Saiz (2010) used American urban samples and Liu et al.

(2019) used Chinese urban samples to investigate the effect of land use regulation

and natural geographic constraints on housing supply. This paper is different from the

above two kinds of literature in the following aspects. First, based on empirical facts

about China, we depict a complete GLR system from the central government to local

governments by simultaneously considering land supply, allocation, and use regulations.

Existing studies only focus on land use regulation. Second, we put three kinds of GLR

into a unifi ed theoretical framework and compare the marginal effect of each kind of

GLR on housing price after solving the endogenous problems. This is also different