Market effects of government reference price for resale housing transactions

This paper investigates the market effects of a reference price policy (the RP policy, hereafter) for resale housing of selected residential projects in Shenzhen, China. The RP policy sets ONE reference price per square meter for each regulated residential project, and requires housing listing prices as well as banks’ valuation in mortgage lending to be below the reference price, but it does not limit transaction prices. Using housing listing, transaction, and rental data, we have two findings. First, the policy lowers the probability of transaction in the regulated projects, which prolongs home sellers’ time on the market; the deeper the reference price is below the would-be listing price of a residential project, the more substantial the probability of transaction is reduced. But we do not find evidence that it significantly reduces housing transaction prices. Second, the RP policy induces more homes in regulated projects to be leased out and reduces housing rents. We explain the two findings as the outcome of home buyers’ and sellers’ reference-dependent and regret-avoidant behaviors. Additionally, we discuss the spillover of the policy effects from regulated to unregulated projects, as well as the possible confounding effect of the RP policy’ role as finance constraint for buyers.