Effects-of-restrictive-land-supply-on-housing-in-H

EffectsofRestrictiveLandSupplyonHousinginHongKong263JournalofHousingResearch•Volume5,Issue2263©FannieMae1994.AllRightsReserved.EffectsofRestrictiveLandSupplyonHousinginHongKong:AnEconometricAnalysisRuijuePengandWilliamC.Wheaton*AbstractThisarticleanalyzesthemechanismbywhichchangesinthesupplyofdevelopablelandaffecthousingpricesandhousingoutput.Theobjectiveistodeterminewhetherasuddenscarcityoflandraiseshousingpricesbecauseofsuppressedcurrenthousingproductionorbecauseofhigherinvestmentdemand(duetoexpectedlandscarcityandhigherrents).TheanalysisisbasedonHongKong,acity-statewherethesupplyofnewlandisunderstrictgovernmentcontrol,providingauniquesituationforstudyingtheimpactofsupplyrestrictions.Amultiequationaggregatehousingmodelisdevelopedinwhichgovernmentlandsalesareincorporatedinbothhousingdemandandsupply.TheresultsshowthatsupplyrestrictionsinHongKonghavecausedhigherhousingpricesbutnotlowerhousingoutput.Thehigherpricesresultdirectlyfromcapitalizationofexpectedhigherrents,andtheyencouragecapitallandsubstitutioninhousingproduction.IntroductionEmpiricalresearchhasconclusivelyestablishedthatrestrictionsorashortageofurbanlandwillraisemetropolitanhousingprices.How-ever,mostoftheevidencehasbeenbasedonsimplecross-sectionmodelsthatcomparehousingpricesfromdifferentmetropolitanareas.Thereisnoeconomicresearchthatdescribeseitherthetimepathortheexactmechanismthroughwhichlandsupplydetermineshousingprices.Doesasuddenscarcityofexpectedfuturedevelopablelandfirstreducehousingconstruction,whichinturndrivesupprices,ordoestheexpectedscarcityoflanddirectlyalterhousingprices,whichthenleadstocapitallandsubstitutionandpossiblyatemporaryincreasein*RuijuePengisattheMassachusettsHousingFinanceAgency,andWilliamC.WheatonisattheDepartmentofUrbanStudiesandPlanningandCenterforRealEstate,MassachusettsInstituteofTechnology.TheauthorsthankBertrandM.RenaudoftheWorldBankforhissuggestionoftheresearchtopic.ThanksarealsoduetotheRatingandValuationDepartmentofHongKong,theLandsandBuildingDepartmentofHongKong,andtheHangLungDevelopmentCompanyLtd.ofHongKongforprovidingdataforthisresearch.264RuijuePengandWilliamC.Wheatonthedevelopmentofhousing?Thefirstexplanationinvolvesmyopicbehaviorbydevelopersandbuilders,whilethesecondinvolvesmoresophisticated,forward-thinkingexpectations.Thisarticleattemptstofillthevoidbydevelopinganeconometricanalysisofthehousingmarketinanareawherelandsupplyrestrictionsareimportant—HongKong.Asacity-state,HongKonghasafixedboundary.Besidesthisnaturalrestrictionontheeventuallandsupply,theflowofnewlandavailablefordevelopmentinHongKongisdirectlycontrolledbyitsgovernment.Thegovernmentdetermineswhenandhowmuchnewlandwillbeputonthemarketaswellastheusesallowedonthisland.Becausetheflowoflandsupplyisexogenouslydeterminedandeasilymeasured,HongKongoffersauniquesituationtostudyandtracetheimpactoflandsupplyrestrictions.InHongKong,theinfluenceoflandsupplyonhousingpricesisquiteclear.Theannualsaleoflandforprivatehousingbetween1964and1990isshowninfigure1.Thecompletionofnewunitsduringthesameperiodisshowninfigure2.Whilesomeoftheyear-to-yearmovementsinlandsalesappearcorrelatedwithcompletions,thereshouldbeatleastatwo-yearlag,sinceHongKong’shigh-risehousinginvolvesconsiderabledevelopmentandconstructiontime.Furthermore,thelongertermmovementsarelargelyunrelated.Similar(high)levelsofcompletionsoccurredin1966,1973,1979,and1986,whilethelandsalesineachoftheseyears(ortheyearprior)arequitedifferent.Thegrowthrateinrealhousingpricesisshowninfigure3.Aclearcorrelationbetweenlandsalesandhousingpricescanbeobservedfromfigures1and3:Low(high)landsalesseemtoincrease(decrease)housingpriceswithwhatappearstobeaboutayear’slag.Thefirstexplanationforanegativecorrelationbetweenlandsalesandhousingpricesisthatareductioninlandsalespreventsdevelopersfromgettingthelandtheyneedtocompletedesiredhousingproduc-tion.Asconstructionslows,thestockofhousingfailstokeeppacewithdemand,raisingprices.Theabsenceofaclear(andlagged)relation-shipbetweenfigures1and2suggeststhatthisisnotalikelyexplana-tion.Analternativeview,basedlargelyonurbanspatialtheory(Peng1993),suggeststhatinaclosedcitylikeHongKong,housingsupplymusteventuallykeeppacewithpopulationincreases,butitdoessowithincreasingsubstitutionofcapitalforland—encouragedbyhigherprices.Inadynamiccontext,reducedsalesofnewlandareseentocauseasmallerlong-runsupplyofland,whicheventuallywillraisetherentsthatpeoplewillpayforhousingandland.Inarationalmarket,theseanticipatedhigherfuturerentsarecapitalizedintohigherEffectsofRestrictiveLandSupplyonHousinginHongKong265+++++++++++++++++++++++19651967196919711973197519771979198119831985198719894003002001000ThousandsofSquareMeters1965196719691971197319751977197919811983198519871989403020100ThousandsofUnits++++++++++++++++++++++++++Figure2.PrivateHousingSupply(newunits)Figure1.LandSalesforPrivateHousing+currenthousingprices.Higherhousingpricesgeneratehigherresiduallandprices,whichinturnleadtocapitallandsubstitutioninhousingproduction.Inthisadjustmentmechanism,restrictionsonlandsupplydonotreducetheproductionofhousingunitsbutin