Separating the consumption and investment demands for housing: Evidence from urban China

Over the last two decades, housing price-oriented regulation of the real estate market has sparked various debates in several contexts, including policy effectiveness and institutional bias. Scholars have explored the broad impact of policies such as land use controls, property taxes, and financial leverage on housing prices. However, very few studies have focused on the role of separating the consumption and investment demands for housing, especially when the housing bubble prevails and the basic living demands of residents are not fully met. This paper proposes a theoretical model and an empirical method to separate the consumption and investment demands for housing. Using data on housing sales prices and housing rental prices in 70 cities in China, we apply the CES effect function to exhaustively estimate the size of consumption and investment demand, and use a Two-level Hierarchical Liner Model to measure the heterogeneous effects of consumption demands and investment demands on housing prices and economic growth. Our study provides an insightful snapshot of the gradual housing market reform that is unfolding and has yet to be studied in contemporary China.