Land Finance Incentives Of Local Government And Housing Price Fluctuation

Chinese real estate industry has been developed rapidly in recent years.Housing price’s constant rising has brought to public attention. A series of problemshave been occurred, although the real estate industry promoted the development ofeconomy. First is to find out the reason. In addition to the supply and demand, theeffect of local government should not be ignored. This article’s analysis is based onthe phenomenon of local governments promote housing prices. From the perspectiveof land finance, the paper explores the mechanism of local governments’ action inreal estate market, and attempts to provide realistic and feasible measures tomaintain the housing price stable and keep a healthy economic development.This paper firstly reviews that local governments rely heavily on land finance,and points out this situation is unsustainable. The analysis of local governments’costs and benefits in the housing market reveals the origin of local governments’action is the financial pressure. This pressure comes from the system of politicalincentive and fiscal decentralization. The above analysis lays a foundation formaking recommendations.Secondly, we use the impact-conduct theoretical framework, to analysis thelocal governments’ impact on the rising price. See local governments’ action asexternal shocks, and drew out the process of the fluctuation in housing market. Theprice of the real estate’s constant rising is the result. These provide a theoreticalbasis for the following research.Thirdly, based on the panel data of30provinces from2005to2010, we buildmodels and conduct empirical analysis on local governments’ financial pressure andthe housing price. Empirical results show that local governments’ actions have asignificant effect on housing price.Finally, it is suggested that we should establish a harmony financial system inwhich local governments’ fiscal authority matches their performance authority,impose property tax, and improve the current incentive mechanism. We hope theseproposals are beneficial to prevent the housing price’s fluctuations.