HOUSING PRICES IN URBAN CHINA AS DETERMINED BY DEMAND AND SUPPLY

This paper studies the demand for and supply of residential housing in urban China since the late 1980s when the urban housing market became commercialized. Using aggregated annual data from 1987 to 2012 in a simultaneous equations framework we show that the rapid increase in the urban residential housing price can be well explained by the forces of demand and supply, with income determining demand and cost of construction affecting supply. We find the income elasticity of demand for urban housing to be approximately 1, the price elasticity of demand to be approximately -1.1 and the price elasticity of supply of the total housing stock to be approximately 0.5. The resulting long-run effect of income on urban housing prices in elasticity terms is approximately 0.7, because the increase in income has shifted the demand curve outward more rapidly than the supply curve.