Population growth, interest rate, and housing tax in the transitional China

TL;DR

This paper develops an integrated model to analyze how interest rate and population growth shocks affect housing prices in China, and evaluates the effectiveness of different housing taxes in stabilizing the market.

Contribution

It combines models from previous studies to analyze housing market responses to shocks and policy tools in a unified framework specific to transitional China.

Findings

Flow tax reduces housing price volatility caused by population growth shocks.

Stock tax has no significant effect on volatility from population growth shocks.

Neither housing tax effectively stabilizes prices when shocks are due to interest rate changes.

Abstract

This paper combines and develops the models in Lastrapes (2002) and Mankiw & Weil (1989), which enables us to analyze the effects of interest rate and population growth shocks on housing price in one integrated framework. Based on this model, we carry out policy simulations to examine whether the housing (stock or flow) tax reduces the housing price fluctuations caused by interest rate or population growth shocks. Simulation results imply that the choice of housing tax tools depends on the kind of shock that housing market faces. In the situation where the housing price volatility is caused by the population growth shock, the flow tax can reduce the volatility of housing price while the stock tax makes no difference to it. If the shock is resulting from the interest rate, the policy maker should not impose any kind of the housing taxes. Furthermore, the effect of one kind of the housing tax can be strengthened by that of the other type of housing tax.