Growth-driven shantytown redevelopment and housing market dynamics in the low-tier cities of China

Xu, Hangtian and Zheng, Wenzhuo (2024): Growth-driven shantytown redevelopment and housing market dynamics in the low-tier cities of China.

Abstract

We analyze the housing market consequences of a large-scale government-led urban redevelopment program in China that relies on a specialized financial instrument. With a special loan support from the central bank, local governments of low-tier cities purchased a huge number of sub-standard dwellings in their urban areas between 2015 and 2019, accounting for approximately 3.3% of the country's urban housing stock, and then carried out demolition. Resale revenue from the reassembled land is expected to repay the loan. Families whose shantytown homes were collected got generous cash resettlement. The proportion of urban households receiving cash resettlement varies by city. Dealing with the self-selection problem of this policy intensity based on an instrumental variable approach, we find that in cities with a higher proportion of urban households receiving this windfall, housing and residential land prices have fallen relatively despite an increasing demand, while housing oversupply has deteriorated. This is partly caused by the program-induced changes in beliefs, leading to speculative housing demand and, in turn, an exaggerated supply-side response from the government. The latter, seemingly myopic, was prompted by the growth motive of local governments, as the implementation of the program was growth-driven, in addition to welfare-improving oriented.

• Item Type: MPRA Paper
• Language: English
• Keywords: urban redevelopment, belief, housing supply, low-tier cities
• Subjects: R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R2 - Household Analysis > R23 - Regional Migration ; Regional Labor Markets ; Population ; Neighborhood Characteristics; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location > R31 - Housing Supply and Markets

References

Ahlfeldt, G. M., Maennig, W., & Richter, F. J. (2017). Urban renewal after the Berlin Wall: a place-based policy evaluation. Journal of Economic Geography, 17(1), 129-156.

Bertrand, M., Duflo, E., & Mullainathan, S. (2004). How much should we trust differences-in-differences estimates? The Quarterly Journal of Economics, 119(1), 249-275.

Bordalo, P., Gennaioli, N., & Shleifer, A. (2022). Overreaction and diagnostic expectations in macroeconomics. Journal of Economic Perspectives, 36(3), 223-244.

Bordalo, P., Gennaioli, N., Ma, Y., & Shleifer, A. (2020). Overreaction in macroeconomic expectations. American Economic Review, 110(9), 2748-2782.

Bordalo, P., Gennaioli, N., Porta, R. L., & Shleifer, A. (2024). Belief overreaction and stock market puzzles. Journal of Political Economy, 132(5), 1450-1484.

Brueckner, J. K. (2013). Slums in developing countries: New evidence for Indonesia. Journal of Housing Economics, 22(4), 278-290.

Brueckner, J. K., Mation, L., & Nadalin, V. G. (2019). Slums in Brazil: Where are they located, who lives in them, and do they ‘squeeze’the formal housing market?. Journal of Housing Economics, 44, 48-60.

Burnside, C., Eichenbaum, M., & Rebelo, S. (2016). Understanding booms and busts in housing markets. Journal of Political Economy, 124(4), 1088-1147.

Chang, J. J., Wang, Y., & Xiong, W. (2024). Price and volume divergence in China’s real estate markets: the role of local governments. Working Paper.

Chen, T., Tan, Y., Wang, J., & Zeng, C. (2022). The unintended consequence of land finance: Evidence from corporate tax avoidance. Management Science, 68(11), 8319-8342.

Chen, Z., He, Z., & Liu, C. (2020). The financing of local government in China: Stimulus loan wanes and shadow banking waxes. Journal of Financial Economics, 137(1), 42-71.

China Household Finance Survey (2018). The Urban Household Asset Index Report for the first quarter of 2018. (in Chinese). Retrieved from https://chfs.swufe.edu.cn/info/1321/2571.htm.

Collins, W. J. & Shester, K. L. (2013) Slum clearance and urban renewal in the United States. American Economic Journal: Applied Economics, 5 (1): 239–73.

Diamond, R., & McQuade, T. (2019). Who wants affordable housing in their backyard? An equilibrium analysis of low-income property development. Journal of Political Economy, 127(3), 1063-1117.

Ding, C., Niu, Y., & Lichtenberg, E. (2014). Spending preferences of local officials with off-budget land revenues of Chinese cities. China Economic Review, 31, 265-276.

Eyraud, L., & Lusinyan, L. (2013). Vertical fiscal imbalances and fiscal performance in advanced economies. Journal of Monetary Economics, 60(5), 571-587.

Galiani, S., Gertler, P. J., Undurraga, R., Cooper, R., Martínez, S., & Ross, A. (2017). Shelter from the storm: Upgrading housing infrastructure in Latin American slums. Journal of urban economics, 98, 187-213.

Gan, L., He, Q., Si, R., & Yi, D. (2019). Relocating or redefined: A new perspective on urbanization in China. NBER Working Paper No. w26585.

Gandhi, S., Green, R. K., & Patranabis, S. (2022). Insecure property rights and the housing market: Explaining India’s housing vacancy paradox. Journal of Urban Economics, 131, 103490.

Gao, Y., Tian, L., Ling, Y., Li, Z., & Yan, Y. (2023). From welfarism to entrepreneurialism: Impacts of the “shanty-area renovation” scheme on housing prices in China. Habitat International, 138, 102875.

Gao, Z., Sockin, M., & Xiong, W. (2020). Economic consequences of housing speculation. The Review of Financial Studies, 33(11), 5248-5287.

Gennaioli, N., Shleifer, A., & Vishny, R. (2015). Neglected risks: The psychology of financial crises. American Economic Review, 105(5), 310-314.

Glaeser, E. L., & Nathanson, C. G. (2015). Chapter 11 - Housing Bubbles, Editor(s): Gilles Duranton, J. Vernon Henderson, William C. Strange, Handbook of Regional and Urban Economics, Elsevier, Vol. 5, 701-751.

Glaeser, E., Huang, W., Ma, Y., & Shleifer, A. (2017). A real estate boom with Chinese characteristics. Journal of Economic Perspectives, 31(1), 93-116.

Global Times (2024). PBC resumes use of PSL facility to inject 350b yuan into policy banks. Retrieved from https://www.globaltimes.cn/page/202401/1304714.shtml. (January 03, 2024).

Greenwood, R., & Hanson, S. G. (2015). Waves in ship prices and investment. The Quarterly Journal of Economics, 130(1), 55-109.

Guerrieri, V., Hartley, D., & Hurst, E. (2013). Endogenous gentrification and housing price dynamics. Journal of Public Economics, 100, 45-60.

He, S., Zhang, M., & Wei, Z. (2020). The state project of crisis management: China’s Shantytown Redevelopment Schemes under state-led financialization. Environment and Planning A: Economy and Space, 52(3), 632-653.

He, Z., Liu, Z., Su, Y., & Zou, K. (2024). Mobility and Housing: Cash-based Resettlement in China’s Shantytown Renovation.Working Paper.

Hornbeck, R., & Keniston, D. (2017). Creative destruction: Barriers to urban growth and the Great Boston Fire of 1872. American Economic Review, 107(6), 1365-1398.

Kaplan, G., Mitman, K., & Violante, G. L. (2020). The housing boom and bust: Model meets evidence. Journal of Political Economy, 128(9), 3285-3345.

Kydland, F. E., & Prescott, E. C. (1982). Time to build and aggregate fluctuations. Econometrica: Journal of the Econometric Society, 1345-1370.

Lakonishok, J., Shleifer, A., & Vishny, R. W. (1994). Contrarian investment, extrapolation, and risk. The Journal of Finance, 49(5), 1541-1578.

Landvoigt, T. (2017). Housing demand during the boom: The role of expectations and credit constraints. The Review of Financial Studies, 30(6), 1865-1902.

Li, F., & Xiao, J. J. (2020). Losing the future: Household wealth from urban housing demolition and children's human capital in China. China Economic Review, 63, 101533.

Li, F., Xiao, J. J., & Cai, F. (2019). Wealth, labor supply and life satisfaction: The case of urban housing demolition in China. Economics Letters, 183, 108597.

Liu, C. (2023). Shantytown Redevelopment and Housing Prices: Empirical Evidence from Chinese Cities. Land, 12(4), 823.

Liu, C., & Xiong, W. (2020). China’s Real Estate Market, The Handbook of China's Financial System, edited by Marlene Amstad, Guofeng Sun, and Wei Xiong. Princeton University Press, 181-207.

Malmendier, U., & Nagel, S. (2011). Depression babies: Do macroeconomic experiences affect risk taking?. The Quarterly Journal of Economics, 126(1), 373-416.

Malmendier, U., & Nagel, S. (2016). Learning from inflation experiences. The Quarterly Journal of Economics, 131(1), 53-87.

Marx, B., Stoker, T., & Suri, T. (2013). The economics of slums in the developing world. Journal of Economic perspectives, 27(4), 187-210.

Mian, A., & A. Sufi. (2014). House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again. University Of Chicago Press: Chicago.

Mian, A., & Sufi, A. (2022). Credit supply and housing speculation. The Review of Financial Studies, 35(2), 680-719.

Murphy, A. (2018). A dynamic model of housing supply. American Economic Journal: Economic Policy, 10(4), 243-267.

Owens III, R., Rossi-Hansberg, E., & Sarte, P. D. (2020). Rethinking detroit. American Economic Journal: Economic Policy, 12(2), 258-305.

Pan, F., Zhang, F., Zhu, S., & Wójcik, D. (2017). Developing by borrowing? Inter-jurisdictional competition, land finance and local debt accumulation in China. Urban Studies, 54(4), 897-916.

Qu, X., Xu, Z., Yu, J., & Zhu, J. (2023). Understanding local government debt in China: A regional competition perspective. Regional Science and Urban Economics, 98, 103859.

Que, W., Zhang, Y., & Schulze, G. (2019). Is public spending behavior important for Chinese official promotion? Evidence from city-level. China Economic Review, 54, 403-417.

Raveh, O., & Tsur, Y. (2020). Resource windfalls and public debt: A political economy perspective. European Economic Review, 123, 103371.

Rogoff, K. S., & Yang, Y. (2024). A tale of tier 3 cities. Journal of International Economics, 152, 103989.

Rossi-Hansberg, E., Sarte, P. D., & Owens III, R. (2010). Housing externalities. Journal of Political Economy, 118(3), 485-535.

Shen, K., Shi, Y. (2022). The patterns, scale measure and risk assessment of local government’s implicit liabilities. Economic Perspectives, (07):16-30. (in Chinese).

Shenwan Hongyuan Securities Co., Ltd. (2024) How much investment has been driven by cash resettlement in history? (in Chinese). Retrieved from https://caifuhao.eastmoney.com/news/20241017125039986035590 (October 17, 2024).

Shi, X., & He, Z. (2022). Housing demolition and financial market investment: Evidence from Chinese household data. Applied Economics, 54(36), 4213-4226.

Siodla, J. (2015). Razing San Francisco: The 1906 disaster as a natural experiment in urban redevelopment. Journal of Urban Economics, 89, 48-61.

Siodla, J. (2017). Clean slate: Land-use changes in San Francisco after the 1906 disaster. Explorations in Economic History, 65, 1-16.

Song, Z. & Xiong, W. (2024). The Mandarin Model of Growth. American Economic Review, R&R.

The Official Website of the Central People’s Government of China (2015) China’s State Council Launches Three-Year Plan for Shantytown Redevelopment and Dilapidated Housing Renovation, Bolstering New-Type Urbanization (in Chinese). Retrieved from https://www.gov.cn/zhengce/2015-06/17/content_2881090.htm?trs=1 (June 17, 2015).

The State Council of China (2013). Opinions of the State Council on Accelerating the Work of Shantytown Redevelopment (in Chinese). Retrieved from https://www.gov.cn/zhengce/content/2013-07/12/content_4556.htm. (July 12, 2013).

Wang, Z., Hui, E. C. M., & Liang, C. (2024). Developer sentiment, developer’s strategy and housing supply: evidence from Hong Kong. Regional Studies, Aug 7: 1-20.

Wang, Z., Zhang, Q., & Zhou, L. A. (2020). Career incentives of city leaders and urban spatial expansion in China. Review of Economics and Statistics, 102(5), 897-911.

Xiong, W. (2023). Derisking real estate in China’s hybrid economy. NBER Working Paper No. 31118.

Xu, H. (2023). Commercial‐to‐residential land‐use conversion and residential recentralization in large cities. Canadian Journal of Economics, 56(1), 306-338.

Xu, H., & Wang, S. (2019). Urban redevelopment and residential location choice: Evidence from a major earthquake in Japan. Journal of Regional Science, 59(5), 850-882.

Xu, H., & Zhou, Y. (2019). Public housing provision and housing vacancies in Japan. Journal of the Japanese and International Economies, 53, 101038.

Yi, D., Wu, D., Gan, L., & Clark, W. A. (2024). Does urban housing demolition increase wealth inequality in China?. Cities, 150, 105053.

Zeng, J., & Zhou, Q. (2024). Mayors’ promotion incentives and subnational-level GDP manipulation. Journal of Urban Economics, 143, 103679.

Zhou, Z. (2022). The effects of state-led relocation on labor market participation: Evidence from China. China Economic Review, 73, 101706.