Abstract
A striking empirical feature of the currently overheated Chinese housing market is the coexistence of the steady growth in real prices and excess supply. In this study, we provide a new perspective to explain this feature, demonstrating that water resources availability plays a significant role in the formation of the housing market equilibrium. By using water resources, local governments can improve the waterfront amenities to entice consumers to participate in the housing market, which will increase the equilibrium price and may ultimately result in an increase in fiscal revenue and social welfare. We propose a theoretical model to describe the formation mechanism of the housing market equilibrium and use panel data on 31 provinces from 2004 to 2014 to test our theory. The results of our empirical study show that water resources availability positively affects the growth in housing prices, but that the marginal effect decreases. Our policy suggestion is that the central government of China should adopt customized policies to the housing markets of different provinces, considering their water resources availability and waterfront amenities.
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