PANOECONOMICU, 3, 4, pp. 557-568 Received: 3 April ; Acceped: 7 epember. UC 35.778.55 OI:.98/PAN34557H Professional paper Ge He College of Economics and Managemen of ichuan Agriculural Universiy, China hege@sicau.edu.cn Equilibrium-Oriened Housing upply: A Case udy of Chengdu Ciy, China ummary: here is a growing concern regarding housing supply managemen because of soaring housing prices consequen o recen mare failure in China. his sudy is aimed a presening an equilibrium-oriened housing supply managemen model ha inegraes housing supply and demand wih ime lag and reasonable vacancy area. For validiy es of he model, Chengdu Ciy was seleced as a sample. he sudy esablishes he feasibiliy of his model by demonsraing ha opimized housing supply can narrow he gap beween housing supply and demand. he implicaion of his finding is ha planning of housing supply is an imporan managemen ool and ha in applying his ool, local governmen should inervene in housing mare o ensure scienific consideraion of ciys developmen posiion, economic growh and housing demand. he funding source: China Naional Philosophy and ocial cience Foundaion 9CJY67. Key words: Housing supply managemen, Housing mare, Housing price, ynamic economics model, China. JEL: R3, 4. Managing housing supply has been a maer of increasing concern in he conex of soaring housing prices consequen o recen mare failure in China. China has undergone a ransiion from cenrally planned economy o mare economy. Mare mechanisms play a fundamenal role in housing allocaion and he ransiion gave China s housing mare an unprecedened prosperiy. For insance, he saisics of Naional Bureau of aisics of China NBC show ha he housing secor s share in GP increased annually by 5.6%, 5.7%, 5.8%, 6.% and 6.6% over he period 5-9 Naional Bureau of aisics of China. However, mare mechanism is no always effecive in housing supply, owing o mare failure, which leads o imbalance beween housing supply and demand and consequen increase in housing price. uring he period 4-7, average housing prices in China increased sharply from 68 RMB/m o 4459 RMB/m, wih a nominal rae of 7.% per year or 3.% in real erms NBC. he growh rae of housing prices exceeds ha of urban residens disposable income and GP. his no only poses a high ris o China s economic developmen bu also creaes some serious social problems, such as urban sprawl, environmenal degradaion and wealh gaps. Mare failure requires he governmens o inervene in he housing mare by supply managemen o bring housing supply and demand ino equilibrium. o, his sudy focuses on finding a housing supply managemen model and esing is feasibiliy. he conens of his paper are organized as follows: he nex
558 Ge He secion ecion reviews he lieraure relaed o his subjec; ecion presens he empirical model and daa used in his sudy; ecion 3 describes he findings of his sudy and ecion 4 presens he conclusions and policy implicaions, followed by discussion and conclusions.. Lieraure Review Ineres in housing supply has been growing ever since China opened up is housing secor and adoped he policy of reform ha ransformed he housing secor from a governmen-conrolled secor o a mare-deermined one. Earlier sudies concenraed mosly on qualiaive analysis of he facors ha affec housing supply, including economic growh, propery ax, land use planning or urban planning, elasiciy of housing supply or demand and housing affordabiliy. For example, On-Kwo Lai 998 believes i is rapid economic growh ha riggers he demand for more housing consrucion. hunfeng ong, George. F. Chu, and Rongqing Cao 999 hold ha propery ax may affec welfare disribuion and correc srucural imbalance in housing supply. While Hung-Gay Fung e al. 6 and Hong Zhang 8 alogeher wih Allen Goodman, Kae Barer 8 and Michael Ball argue ha land supply or land use planning, which deermines he quoa, plo raio and sory heigh, has a significan influence on housing supply. Addiionally, Jun Wei, eve N. Robinson, and Michael Y. Zou 9 conclude ha Propery Law of China helps o simulae he housing supply because i can reduce he riss in propery righs. Geoffrey Carliner 973, based on his esimae of he long run income elasiciy of housing demand, concluded ha permanen income elasiciy is less biased han annual income. Alber aiz 8 and Joseph Gyouro 9 hold ha elasiciy of housing supply could be well-characerized as funcions of physical and regulaory consrains, which in urn are endogenous o prices and pas growh. ephen Ma, Lennon Choy, and Winy Ho observe ha affordabiliy could resric he marginalized groups from accessing housing mare, bu Alain Beraud 9 argues ha he poin of conenion is no curren affordabiliy of housing, bu accepable sandard in he sociey. Laer sudies concenrae mainly on how he above-menioned facors affec housing supply by uilizing quaniaive ools. For insance, ongao Wang, uhan Chan, and Bohua u propose a soc-adjusmen model for esimaing he elasiciy of housing supply in he range of. o.4. Hongyan u, Yongai Ma, and Yunbi An uilize coinegraion analysis and Granger causaliy es o ascerain he impac of land policy on housing supply. hey conclude ha land policy may have a shor erm impac on housing supply, bu no a long erm one. Jing Wu, Gyouro, and Yongheng eng inroduce a price index model o calculae how he price change affecs housing supply. hey find ha even a moderae decline in expeced appreciaion may lead o price decline of over 4%, which can grealy affec he developers invesmen expecaions. Objecively, housing supply sudies have never been more conspicuous han wha hey are now, bu almos all of hem fall ino he following caegories: i idenifying he economic, social or geographical facors ha affec housing supply and how heir impac can be analyzed or measured; ii sudying housing supply from PANOECONOMICU, 3, 4, pp. 557-568
Equilibrium-Oriened Housing upply: A Case udy of Chengdu Ciy, China 559 naion-wide or meropolian perspecive; iii esablishing economeric models o explore quaniaive correlaion beween one or more independen variables and one dependen variable. Previous worers laid a good foundaion for sudying housing supply managemen bu negleced some ey poins: a mos of hem concenraed on eiher housing supply or demand, insead of focusing on boh; b housing mare characerisics, such as locaional fixiy, durabiliy, and ime lag in housing supply, as also heir role in housing demand and supply were no sudied in heir enirey; c dynamic economics model serves beer han some saic economeric models in opimizing housing supply, because i requires fewer mainained hypoheses; besides, i does no need causal relaionship beween dependen and independen variables. As has been menioned, o mae up for he above-menioned deficiencies, his paper aemps o develop an equilibrium-oriened model ha inegraes housing supply and demand wih ime lag and reasonable vacancy areas by recursive mehods of dynamic economics. Chengdu Ciy was seleced as a sample o es he feasibiliy of he model by using he ciy-level daa for he period 999-.. Mehodology. Model When i comes o housing mare equilibrium, housing supply and housing demand are considered he mos imporan impac facors, followed by housing vacancy and ime lag. Unlie previous sudies which concenrae mainly on how he housing mare is affeced by housing supply or demand, his paper wored ou a model, based on inegraing housing supply and demand wih reasonable housing vacancy area and ime lag. Reasonable vacancy area is he resulan vacancy in housing mare if supply and demand are in balance and he level o which vacancy area will be resored over a long erm. I is also a mare benchmar beyond which acual vacancy area is considered oo high. he following assumpions were made: housing supply, as an exogenous variable, is deermined by previous vacancy areas and demand; housing demand, as an endogenous variable, is deermined by previous demand; over he period,, acual housing vacancy area a he beginning is, reasonable vacancy area afer years is and acual vacancy area is ; 3 housing supply is and demand. o achieve housing mare equilibrium under he consideraion of housing vacancy and ime lag, he housing supply should simulaneously saisfy he following wo condiions: i minimize he gap beween housing supply and demand; ii minimize he gap beween acual housing vacancy and reasonable housing vacancy. Obviously, a he equilibrium poin, reasonable vacancy equals acual vacancy. herefore, he objecive funcion and consrain condiion ha can balance housing mare is made ou as follows: PANOECONOMICU, 3, 4, pp. 557-568
56 Ge He PANOECONOMICU, 3, 4, pp. 557-568 min, [ ] F where F, denoes objecive funcion, and and he parameers o be solved, and he weigh of he imbalance caused by acual housing supply/demand and acual/reasonable vacancy areas respecively, and Δ he ime inerval. Equaion can be solved by Hamilon funcion as indicaed below: ] [ H where is marginal reasonable housing vacancy area, which means he change in reasonable housing vacancy ha resuls from supplying an added uni of housing. he following equaions can be derived from discree maximum principle: H H H 3 If Δ, Equaion 3 is o be rearranged o yield: 4 ifferenial equaions in and λ can be obained by solving Equaion 4 using he recursive approach: 5 where is he characerisic roo of he differenial equaion.
56 Equilibrium-Oriened Housing upply: A Case udy of Chengdu Ciy, China PANOECONOMICU, 3, 4, pp. 557-568 he following resuls can be achieved hrough classical soluion: B B A A 6 where A, A, B and B are consan coefficiens of differenial equaions, and and heir soluions. By solving Equaions 5 and 6, he opimized housing supply, disregarding ime lag in housing supply, can be represened as shown below: B B 7 where B B A A ; ; 4 ; 4 Assuming ha he ime lag beween he sar of housing consrucion and housing sale is, wo ypes of housing are defined, namely muliple sory greaer han seven sories and high sory no more han seven sories, which were assigned he weighs β and β respecively. he ime lag of housing supply in he former is and in he laer, boh of which can be obained from saisical deparmens or by field survey. hen, 8 Considering he ime lag of housing supply, he developers should build he houses years in advance in accordance wih he opimized housing supply o mee he demand a. herefore, Equaion 7 can be modified aing ino consideraion he ime lag: O B B 9 where O represens he opimized housing supply under consideraion of ime lag of housing supply.
56 Ge He Equaion 9 no only aes housing supply and demand ino accoun, bu also considers he reasonable vacancy area and he ime lag so ha he opimized housing supply area can be obained by solving i. In oher words, his model considers almos all imporan facors ha affec housing mare equilibrium; herefore, he resul is equilibrium-oriened. If local governmens plan housing supply in accordance wih he equilibrium-oriened resul and direc he developers o supply housing as per he plan, he housing mare can achieve equilibrium.. aa Collecion As housing mare is ciy-specific, naion-wide sudies or sudies wih a meropolian perspecive may conceal significan spaial feaures. I is impossible o achieve housing mare equilibrium a naional level. o, sudying housing supply from a ciy s perspecive is much more reasonable, pracical and insrucive. Chengdu Ciy, which lies a he cener of ichuan basin, is a leading financial cener, ranspor cener and aerosaic cener in Wes China, and one of he famous hisorical and ouris ciies in he world. In recen years, Chengdu regisered an economic growh rae ha was much higher han he average growh rae of he sae or of oher ciies in Wes China see able. he rapid economic growh has led o unprecedened boom in he housing mare, which led o a rapid increase in housing prices see able. he share of value added o GP by he housing secor in Chengdu Ciy is greaer han ha by he enire naion and China s wesern regions see able 3. Chengdu Ciy was chosen for his sudy because by achieving housing supply and demand equilibrium i could successfully slow down he rapidly rising housing prices. able Year Per Capia GP Growh Rae of China, Wes China and Chengdu Ciy Uni: RMB, % Real per-capia GP Real GP growh rae China Wes China Chengdu Ciy China Wes China Chengdu Ciy 786 466 47 8. 8.5.8 765 543 34 7.5 9. 3. 84 555 4536 8.3.4 3. 3 9 636 6454 9.3.7 3. 4 336 775 65..9 3.6 5 485 963 9..6 3.5 6 65 96 497.6.7 3.8 7 7 38 36 4. 4. 5.3 8 378 64 34873 9.6. 4.3 9 5576 834 39765 9..8 4. 954 97 399.3 3. 5. ource: China aisical Yearboo. PANOECONOMICU, 3, 4, pp. 557-568
Equilibrium-Oriened Housing upply: A Case udy of Chengdu Ciy, China 563 able Housing Price in Chengdu Ciy - Uni: RMB, % Year Nominal price Nominal growh rae Real price Real growh rae 4 6.94 95 3.3 83 5.9 966. 38 5.4 64. 3 378 9.58 364 5.9 4 45 5.7 3955 3.4 5 5 8.8 4477 6. 6 69. 5697 9. 7 68-3.7 63 -. 8 59 7.74 4637 3.9 9 697.9 637.8 78 6.94 6774 4.7 ource: Chengdu aisical Yearboo. able 3 hare of Value Added o GP by he Housing ecor of China, Wes China and Chengdu Ciy Year China Wes China Chengdu Ciy 999.3.5.7.3.5.8.4.6.8.3.5. 3.3.5.7 4.4.4. 5.4.4. 6.4.4. 7.4.4. 8.4.4.9 9.5.4.7.5.5.8 ource: China aisical Yearboo. As menioned above, o obain opimized housing supply by solving Equaion 7, daa regarding housing demand, housing supply and acual housing vacancy area in Chengdu Ciy for he period 999- is required in advance. For his sudy, he required daa was sourced from China aisical Yearboo and Chengdu aisical Yearboo ee able 4. able 5 shows he descripive saisics of he daa. PANOECONOMICU, 3, 4, pp. 557-568
564 Ge He able 4 Housing emand and upply and Acual Vacancy Areas in Chengdu 999- Uni: million m Year Housing demand Housing supply Acual vacancy area 999 3.7 3.75.86 5. 4.65. 6.8 7.6.5 8.6 7.9.3 3.48 8.98.3 4.9 7..59 5 4. 5.98.63 6 6.78 9.59.5 7.69 8.85.55 8 3.97 8.8. 9 8.67 4.63.86 5.3 3..6 ource: Chengdu aisical Yearboo. able 5 escripive aisics of Independen Variables for 999- Uni: million m Variable Mean Max Min Acual demand 3.94 5.3 3.7 7.74 Acual supply 8.3 4.63 3.75.99 Acual vacancy areas.5.86.5.4 ource: Auhor s calculaions. able 4 shows ha, during he period 999- in Chengdu Ciy, boh housing demand and housing supply increased, and he gap beween he wo grew wider year afer year. For insance, he acual housing demand increased by a facor of 7.99, from 3.7 million m in 999 o 5.3 million m in, and ha of housing supply by 3.46 imes, from 3.75 million m o 3. million m. ha here was a big gap beween housing demand and supply is obvious; he former is much greaer han he laer. Housing prices in Chengdu Ciy increased dramaically in recen years because of he demand-supply gap. Addiionally, he area of housing vacancy increased from.86 million m o.3 million m over he period 999-, and hen i declined from.3 million m o.55 million m. Afer 7, i once again rose from. million m o.6 million m. his reflecs he exisence of considerable gap beween housing supply and demand in Chengdu Ciy over he period covered. 3. Resuls A oal of 7 housing projecs, which accouned for 8.% of he housing projecs in Chengdu Ciy in, were chosen by random sampling for field survey o obain he above-menioned parameers. he following are he resuls: =5%, PANOECONOMICU, 3, 4, pp. 557-568
Equilibrium-Oriened Housing upply: A Case udy of Chengdu Ciy, China 565 β =3%, β =7%, =3, and =. However, resuls for weighs and could no be obained by field survey. o mae up for his, i was assumed ha. 5. Based on his assumpion, could be calculaed from Equaion 8, he soluion being.3. By solving Equaion 9 wih he above parameers, boh opimized vacancy areas and opimized housing supply areas wihou ime lag over he period 3-7 were found o be:..68 6.75.33.6 ~ 5.6 -.6.33.6 5.4.68 ~ 5 aing he ime lag ino accoun, he opimized housing supply over he period -5 was deermined o be: - O.6.6.33.6 5.4.68 ~ 5 Eviews 6. was employed o solve he above-lised equaions. For assessing he resuls, firs, he housing demand over he period -5 was forecased, based on acual housing demand over he period 999-; second, he opimized housing supply area over he period 6- was raced bac by Equaion ; finally, he absolue gap beween acual housing demand and he forecas demand or ha beween acual housing supply and opimized housing supply was wored ou. he resuls are presened in able 6 below. able 6 Absolue Gap beween Housing emand and upply in Chengdu Ciy 6-5 Uni: million m Year Housing demand Forecased demand Housing supply Opimized supply Gap beween demand and supply Gap beween acual/forecas demand and opimized supply 6 6.78 9.59 3.56 7.9 3. 7.69 8.85 6.74 3.84 5.95 8 3.97 8.8 6.8 5.79.85 9 8.67 4.63 8.46 4.4. 5.3 3. 9.3.3 6..75.5.39.43.75.3 3 3.3 3.38.5 4 3.46 3.57. 5 3.7 3.78.8 ource: Auhor s calculaions. PANOECONOMICU, 3, 4, pp. 557-568
566 Ge He he resuls show ha housing supply and demand end o become balanced afer opimizing housing supply by he model. From 6 hrough, he absolue gap ha prevailed beween housing demand and housing supply was much greaer han ha beween housing demand and he opimized housing supply. he demand and supply were 7.9 and 3. million m in 6, 3.84 and 5.95 million m in 7, 5.79 and.85 million m in 8 4.4 and. million m in 9, and.3 and 6. million m in. Had he governmen aen any measure ha encouraged developers o supply more houses as per he opimized housing supply areas, he housing mare would have aained equilibrium, and he housing prices would no have increased so rapidly. Over he period -5, he absolue gap beween he forecased housing demand and he opimized housing supply narrowed o almos he same as in 5. hey were.39 million m,.3 million m,.5 million m,. million m and.8 million m. he resuls show ha he equilibriumoriened housing supply managemen model ha inegraes housing supply and demand wih reasonable vacancy areas and ime lags of housing supply is useful for opimizing housing supply. In shor, he model is a feasible housing supply managemen ool o achieve housing mare equilibrium. 4. Conclusion, Policy Implicaion and iscussion Mare mechanisms play a fundamenal role in housing allocaion, bu hey are no always efficien owing o mare failure. Mare failure requires ha governmen inervene in he housing mare o conrol he increase in acual housing vacancy area and housing prices and hereby mae housing affordable o he public. In view of housing mare s complexiy, hyseresis and inegraion, bringing housing mare ino equilibrium is no easy for he governmen. Compared wih oher ools used by he governmen o inervene in he housing mare, such as price conrol, moneary regulaion and mare license, housing supply managemen is a more efficien ool, because i can affec he housing mare direcly. his paper provides an equilibriumoriened housing supply managemen model ha no only aes housing supply and demand ino accoun, bu also considers he ime lag and reasonable vacancy area. Empirical sudies on Chengdu Ciy show ha opimized housing supply, deermined by using his model, can narrow he gap beween housing supply and housing demand. I hus proves o be a feasible housing supply managemen ool o achieve housing mare equilibrium. he policy implicaions of adoping housing supply planning as a managemen ool are ha local governmens inervene in he housing mare o avoid mare failure, and ha planning be made on scienific basis considering he developmen posiion of he ciy, is economic growh and demand for housing. In he case of Chengdu Ciy, housing supply should be so planned as o mae available he area of.75 million m o mee he demand for.43 million m in. he equilibrium-oriened housing managemen can minimize he gap beween acual housing demand and supply. As far as housing supply managemen is concerned, he wo exreme siuaions of excessive housing supply and sringen housing supply should be avoided. Excessive housing supply leads o urban sprawl, excessive farmland acquisiion and environmen degradaion, besides disorderly compeiion, housing price flucuaion and PANOECONOMICU, 3, 4, pp. 557-568
Equilibrium-Oriened Housing upply: A Case udy of Chengdu Ciy, China 567 poor uilizaion of resources. ringen housing supply leads o price appreciaion, labor migraion and unsusainable developmen of housing secor, besides increasing housing vacancy. he scope of his paper is confined o sudying housing supply based on he same weighs equals. Addiionally, housing supply and demand are deermined heoreically by muliple facors, such as price, locaion and fiscal and moneary policy expecaion Philip Aresis. Furher sudies are warraned o probe ino wha he resuls would be when he above facors are considered. PANOECONOMICU, 3, 4, pp. 557-568
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