Government Interference and the Efficiency of the Land Market in China

Municipal governments in China established direct control of the supply of urban land in August 2004. This paper examines whether this government action mitigates the efficiency of the residential land market. Using a unique data set of detailed land and residential community transactions with manually collected location information for residential land lots in seven Chinese cities, this paper analyzes the relationship between the land lease prices and residential property prices from the first quarter of 2001 to the fourth quarter of 2007. Results indicate that property prices determined land prices both before and after 2004:3, but the effect was significantly weaker after 2004:3. This is consistent with the hypothesis that the market for residential land became less efficient after municipal governments gained direct control of the land supply.