Author: He,Yiyao, Fangzhou Xia

Abstract: A healthy urban housing market should be characterized by relative stability, which is reflected in reasonable fluctuations in housing prices. However, house prices in China have experienced rapid and prolonged growth of approximately twice that of people's disposable income since 2004. This growth can be attributed to the heterogeneous trading behaviors of value investors and domestic and foreign speculators. By constructing a Dynamic Stochastic General Equilibrium (DSGE) model based on the theory of behavioral economics, this study explores how fundamental and speculative investments affect housing prices and economic fluctuations in a market with heterogeneous traders. The devising of optimal macro-control policy is also discussed. Results show that speculators in the housing market explain the rapid rise and slow decline of house prices, which negatively affects a healthy housing market and its output. Excessive substitution effect between consumption and housing purchase resulting from the real estate boom also negatively affects the final output. The simulation experiments of policy intervention show that the combination of exchange rate regulation and property tax contributes to the stability of the housing market and macro-economy as a mix of short- and long-term policies. This paper holds that to ensure the economy's sustainable development in the new era, the central bank should implement market-oriented reforms of the exchange rate and lay out the landing of property tax properly.

Link: https://www.sciencedirect.com/science/article/abs/pii/S0197397519303534