Using Purchase Restrictions to Cool Housing Markets : A Within-Market Analysis

In response to worsening housing affordability resulting from rapid housing price appreciation, governments in some high housing price areas have introduced taxes or restrictions to reduce investment by non-residents in residential real estate. We study the effectiveness of these efforts using the restrictions imposed by local Chinese governments in November 2010 on apartment (condominium units) purchases. Our contribution comes from using data that exploits within city variation in restriction implementation to better control for unobserved city differences and the incorporation of land auction data to identify the supply effect of these policies. Our results suggest that restrictions on non-owner-occupant purchases significantly reduce activity levels by approximately 40% in the short run, compared to areas without restrictions. These effects diminish with time. However, housing price changes are not different between restricted and unrestricted areas. The results operate via end-user demand and not through the land market and the subsequent supply response by developers as neither the number of land auctions or prices paid for land have differential changes between districts with and without purchase restrictions.Business, Sauder School ofNon UBCStrategy and Business Economics, Division ofUnreviewedFacult