Spatial Misallocation in Chinese Housing and Land Markets

Housing and land prices in China have experienced dramatic growth in the past decade. In conjunction with the rapid growth, housing and land price dispersion across Chinese cities have also become more dispersed. This paper intends to explore how market frictions affect the aggregate as well as the spatial distribution of prices. We first document the spatial variations of housing and land market frictions. Larger cities receive less housing and land subsidizes. Land frictions are improving over time. We then embed both frictions into a dynamic competitive spatial equilibrium framework featured with endogenous rural-urban migration. The calibrated model can reasonably mimic the price growth in the data. The counter-factual results suggest that the frictionless economy leads to a slower housing price growth but faster land price growth. In addition, land frictions tend to inhibit land price growth while housing price growth will slow down if only housing frictions are eliminated.