Title: Fiscal Decentralization and its Influence on Housing Price--A Case Study in China
Description: The real estate industry has been one of China’s pillar industries over the last two decades, but soaring housing prices and overheated investments have hindered the sustainable development of the economy. Land transfer fee is a critical determinant of housing prices under the current land reserve system in China and also the main revenue resource for local governments. The reliance of local governments on land-leasing fees as their dominant source of revenue is usually referred as “land finance”, which started from fiscal decentralization and tax sharing reform in 1990s and created a mismatch between revenue distribution and expenditure responsibility for local governments. Therefore, against the background of tax sharing reform, this study analyzes the hypothesis that the degree of fiscal decentralization and the land finance phenomenon are important factors causing China’s soaring housing prices. In addition, land finance is the intermediate variable linking tax reform and high housing prices.

Using panel data covering 31 provinces and municipality cities in China from 2000 to 2009, the research finds that enlarged fiscal decentralization caused by the reform of the tax-sharing system is an indispensable institutional factor leading to the rapid rise of housing prices. This study presents a comprehensive influence mechanism of fiscal decentralization on housing price, contributing to the understanding of local governments’ behavior and provides recommendations for the future urban development.