Dual-market Equilibrium of China's Residential Housing Price

This paper constructs a structural dynamic equilibrium model based on a dual market system, which includes China's residential housing market and the property rental market in China's first-tier urban cities. The paper analyzes dual-market general equilibria under different scenarios as perceived since 200. An open-economy Gordon growth model is also introduced to examine fair housing prices based on the assumption of no arbitrage. Empirical results indicate significant (but time-varying) price deviations from the equilibrium level since 2005 which are mostly driven by contingent demand and property investors. The paper concludes that the contingent purchasing demand supports China's recent residential price hike and that speculation does not dominate the price boom. The recent quota policy has a theoretical downward pressure on the housing price in the short run but it also lifts property rents dramatically in the middle and long run.