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Urbanization, inequality and property prices : equilibrium pricing and transaction in the Chinese housing market

Ge, Teng; Wu, Tao


Teng Ge

Tao Wu


The particularly overheated Chinese housing market, with its soaring property prices, has attracted a large amount of research. We point out three of its striking empirical features, which current literature leaves unexplored: co-existence of steady growth of real transaction price and excess supply, accelerations in price-to-income ratio, and significantly strong positive correlation between real transaction prices and income inequality. A search-equilibrium model is built to explain these facts. Heterogeneous buyers and homogeneous sellers randomly search for partners to trade in a frictional property market. The search equilibrium of the property market is either a high-price-and-low-transaction elitist matching equilibrium, or a low-price-and-high-transaction pooled matching equilibrium. The terms of trade determine which equilibrium arises. Empirical observations argue for the development of China's property market through evolution from a pooled matching equilibrium to an elitist matching equilibrium. We set out to show that the market equilibrium is always inefficient, due to crowding out externalities and market incompleteness. Policy experiments support redistributive tax, as a means to improve social welfare.


Ge, T., & Wu, T. (2017). Urbanization, inequality and property prices : equilibrium pricing and transaction in the Chinese housing market. China Economic Review, 45, (310-328). doi:10.1016/j.chieco.2016.04.005. ISSN 1043-951x

Journal Article Type Article
Acceptance Date Apr 23, 2016
Online Publication Date Apr 26, 2016
Publication Date 2017-09
Deposit Date May 4, 2016
Publicly Available Date May 4, 2016
Journal China economic review
Print ISSN 1043-951x
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 45
Pages 310-328
Keywords Housing market; Search and match; Inequality; Optimal pricing
Public URL
Publisher URL
Copyright Statement © 2016, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International
Additional Information Authors' accepted manuscript of article published in: China economic review, 2016, v.45.


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