Long-run mechanism for house price regulation in China: Real estate tax, monetary policy or macro-prudential policy?

Abstract

China has experienced rapid economic growth in recent decades. The benefits of economic growth are indisputable. However, risks are also generated that can jeopardize the sustainability of economic progress. Real estate bubbles, for example. The rapidly soaring house prices are one of the severe challenges in China in recent years. The real estate tax, monetary policy, and macro-prudential policy are the three main measures of the Chinese government to stabilize house prices. This paper studies the topic of which policy or policy portfolio can be an effective long-run mechanism of house price regulation by incorporating the real estate sector into the Dynamic stochastic general equilibrium (DSGE) model. Three important conclusions are drawn from the numerical simulation analysis based on the data of China. First, employing any policy portfolio can mitigate the fluctuation of house prices more effectively and decrease the loss of social welfare relatively compared to implementing a single policy. Second, the long-run regulating effect of the policy portfolio of monetary policy and macro-prudential policy can suppress the fluctuation of house prices in China while minimizing social welfare loss. Third, whether the real estate tax is combined with monetary policy or macro-prudential policy, the long-run regulating effect is insignificant. The real estate tax cannot be used to regulate house prices in China.