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Housing Price 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 about 1, the price elasticity of demand about -1.1, and the price elasticity of supply of the total housing stock about 0.5. The resulting long-run effect of income on urban housing price in elasticity terms is about 0.7, because the increase in income has shifted the demand curve outward more rapidly than the supply curve.

JEL-Codes: R21, R31, C32

Keywords: housing demand, housing supply, urban housing price, China

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