Arrested Development in China

Bianca He, Finance PhD student
Eric Zwick, Associate Professor of Finance and Fama Faculty Fellow

What is the effect on the real estate market of “speculators”—investors who receive no direct utility flows from real estate? We seek to answer this question in the context of the Chinese real estate market, which is currently experiencing one of the largest real estate booms in world history. A literature in finance has argued that speculators amplify booms in asset prices in the presence of short-sales constraints. Our goal is to test this prediction in the Chinese real estate market. Our broad strategy is to exploit cross-sectional variation in the ease of speculating, with a focus on the role of developers. Specifically, we will use differences across municipalities in land use policy and local government connectedness and preexisting builder footprints as potential sources of exogenous variation in land available for development and speculation. We will use detailed micro data on house and land transactions from official Chinese records maintained by central and municipal authorities.