Which is Driver? Land Price or Housing Price: Examining the Urban Spatial Structure of Beijing

Abstract

This paper examines the spatial structure of Beijing to determine the relationship between land price and housing price. The purposes of the paper are two-fold. One is to help to better understand the roles in which land markets play in urban development and the other is to explain skyrocketing land prices, particularly in the first decade of the 21st century. It has been debated whether land supply is the main cause for skyrocketing land prices. This paper, however, concludes that it is housing price that drives up skyrocketing land prices. The analytical framework to draw the conclusion is to investigate urban spatial development patterns to see if they are consistent with the outcomes of urban model/theory in which land is treated as a production factor for housing and land demand is a derived demand. If the answer is yes, we can conclude the driving role of housing prices on land prices, even though we recognize the effect of land supply restrictions on land prices. So the paper first examines the urban spatial pattern of Beijing, with reference to urban economic model. And then the paper estimates the parameters of a CES-type housing production function. The paper conducts numerical simulation to illustrate how a small increase in housing prices will lead to big increases in land prices. The paper concludes (1) effective roles of price mechanism in land and urban development as manifested by relatively fast decay of land prices compared to housing prices, as expected according to urban theory; and (2) a 25% increase in housing price can lead to 50–125% increases in land prices, depending on the distance to city center. We believe that our finding has substantial policy implications in China.