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, we analyze the relationship between the land lease prices and residential property prices from the first quarter of 2001 to the fourth quarter of 2005. We find that residential property prices determine residential land prices prior to 2004:3, but have no influence after 2004:3. This supports the hypothesis that the market for residential land became less efficient after local Chinese governments initiated direct control of the land supply, in the sense that land transaction prices no longer reflect the demand for land