In recent years, the rapid growing housing prices and the continuing expanding real estate bubbles have become a hidden danger to the Chinese economy. Price regulation has also become one of the current hot issues. Though the central government issued a number of decrees, the price has been increasing, especially in first-tier cities, like Beijing, Shanghai, Guangzhou, and Shenzhen. What factors contributed to the high prices? The central and local governments play an important role in housing price regulation. From the perspective of game theory, behavior of central and local government under price control policies are described and analyzed in this article. We established a game model and got equilibrium between the two games. In the end, we raised some reasonable policy recommendations by the results of game analysis.
In 1993, China’s real estate began to develop and has become a pillar industry of the national economy. The rapid development of real estate market has greatly promoted economic growth, but has also left a hidden danger on the national economy, sustainable development, and social harmony. More and more young people cannot afford a house because of the high price. Once the real estate bubble burst, it is bound to bring incalculable consequences. The 2008 US “subprime crisis” triggered the global economic crisis because the real estate industry brought irrational prosperity and development. With the increasingly prominent issue of high prices, scholars studied factors that influenced prices from different perspectives. First, scholars studied single factor or factors affecting the economic fundamentals of the prices and concluded that income, population, taxes, interest rates, land prices, and construction costs had short-term or long-term impact on prices. But with the rising level of China’s real estate market prices much higher than the current economic and income growth, visible factors of economic fundamentals have been insufficient to explain the rising price. Scholars began to focus on the real estate market speculation. Speculation can make prices continue to rise over the basic values and thus the real estate bubble economy appears. However, a very important institutional factor has been neglected. Since 2003, the central government has intensively introduced land policy, tax policy, credit policy, administrative regulation, and other regulatory measures (see
In this context, scholars carried out many useful explorations. Zuo Feng [
Year | Policies |
---|---|
2003 | A policy: the State Department explicitly the real estate industry as a pillar industry of the national economy |
2004 | Two policies: Inhibition of land supply, raised deposit and lending rates for the first time announced |
2005 | 6 Policies: mortgage policies canceled, real estate tax reform in depth, the regulation of transactions involving aspects , country eight introduced, rose to political regulation height, tighten Property Trust, hand housing pay a tax |
2006 | 11 policies, regulatory guidance from the steering maneuverability: mortgage interest rates rise again, State six issued, State Council promulgated restrictions dwelling 90/70 policy, State Administration of Taxation issued second-hand housing sales tax policy, sale permit policy, Foreign Ministry of Construction issued limit fried to make, imposition of second-hand housing transfer of personal income tax in the country, land Deal, central bank to adjust the financial institutions RMB benchmark deposit and lending interest rates, Ministry of Construction promulgated urban low-rent housing work-related measures |
2007 | 8 policies , five times the rate hike, the level of pressure from the financial real estate |
2008 | 16 policies , the financial crisis has become a watershed policy, the central bank announced Sept. 15 “double rate” drop, series of supports Real Estate Deal |
2009 | From the beginning of May for the policy divide ,the State Administration of Taxation “LAT liquidation management procedures”; NDRC raised by the Ministry of Finance, State Administration of Taxation, Development and Reform Commission, the Ministry of Construction is responsible for studying the introduction of property tax, exempted from business tax incentives termination, “State four” came out |
2010 | “State eleven”, the real estate market regulation efforts doubled, strict two suites loan management, down payment of not less than 40%, fitness room, low-cost housing, small and medium size housing land of not less than 70%, MLR carried developers at least two percent bid bond, the 50% premium paid in January, hoard developers will be “frozen” and other New Deal regulation, under construction and sale of house property shall cease the sale, Ministry of Housing developers may not loan to buy land, State Department policy to guide private capital into housing construction |
2011 | The new “State eight”, January 28 pilot property tax in Shanghai and Chongqing, increase affordable housing construction and supply |
2012 | 2 New Deal, housing information system network, four rows first mortgage interest rates dropped to baseline |
2013 | “State five” New Deal |
2014 | Purchase of deregulation , the central five, directional drop quasi “micro-stimulus”, “two-way control” |
between them dialectically. Yu Jianyuan [
Since 1994, China’s implementation of the tax system, with the implementation of the central and local governments, “eating in separate kitchens” and “fiscal decentralization” and other policies, local governments have gradually evolved into its own political and economic organization of the utility function to maximize their own interests into the goal. Under the tax sharing the background of fiscal decentralization has expanded each year are caused by local governments to pursue fiscal institutional factors of land, the land size of local government finance has a significant positive impact on the high level of China’s urban housing prices. Therefore, in the course of the real estate market regulation policy passed, the game between the central government and the local government will be created.
Central and local government in the formulation and implementation of the real estate market regulation policy will make different choices based on the actual economic situation faced .According to the basic principles of game theory, game model should be a mixed strategy Nash equilibrium and we can obtain some assumptions as follow.
1) Assumed that participants both central government and local governments are rational, are seeking to maximize collective interests, and both are also risk neutral;
2) Suppose now that the real estate market was overheated, price control policy formulated by the central government is A, Utility factor for a policy implementation is a;
3) Assumed functional form is a linear function;
4) Assume that the utility of the probability obtained by the central government policy is
5) Violation of the local government is β (
ence of irregularities), the probability of extra utility obtained when violation is b;
6) Central monitoring costs is C, if the local governments violations are found by monitoring will fine D.
We can learn from the above assumptions and based on Utility Theory. If the local government is not illegal in the implementation of the policy, then the effectiveness of the policy generated for
ment income utility for
If the local government irregularities in the implementation of the policy process, the effectiveness of the policy generated for
Under different conditions, the central government and local government utility is as follows:
1) The central government does not regulate, local government is not illegal utility of the central government:
utility of the local government:
2) The central government regulate, local government is not illegal utility of the central government:
utility of the local government:
3) The central government does not regulate but local government violate and obtain additional revenue, the central government has lost .
utility of the central government:
utility of the local government:
4) Central government regulate, local government violate, and the central government can find violations and penalties .
utility of the central government:
utility of the local government:
5) Central government regulate, local government violations, but violations have not been found.
utility of the central government:
utility of the local government:
violation probability of local government in the implementation of policies is p, the probability of the central government will be able to find local government’s violation is r, and the probability of supervision is q, then, the probability of local government violate in the implementation of policy is p, under the conditions and Utility function theory:
Expected utility of the central government to carry out supervision and management is:
Expected utility of the central government does not regulate is:
Because Yc1 and Yc2 as a linear function, when Yc1 = Yc2 , the two functions intersect, you can get the best probability of local government in the implementation of policy violations, that is, for local governments, the central government’s supervision and not regulatory is indifference.
Can be calculated by the equation:
Under the situation that probability of the central government rugulate local is q, expected utility of the local government in the implementation of the policy in violation:
Expected utility of local government in the implementation of policy is not illegal is:
Because YL1 and YL2 are linear functions, when
In summary, you can get mixed strategy game model Nash equilibrium is:
In the process of policy implementation for behavioral choice between central and local government is concerned, the best result is not the central government oversight, while the local government is not illegal, then the policy of the central authorities will be able to successfully implemented, but lack of reality. Game analysis drawn from the equilibrium point of view, we should be through institutional arrangements to encourage the probability of local governments violation and the central government oversight as small as possible. In order to make the probability of violation of local governments as small as possible, we have to reduce the equilibrium
solution
To reduce the probability of central government revenue sharing ratio and regulatory costs, increased central government regulation and found irregularities, local governments should increase the penalties for violations. Improve the efficiency of central regulatory supervision need a high-quality team, the real estate market regulation policies related to taxation, financial, economic and other aspects of professional knowledge, but also the departments involved is relatively broad. On the other hand, must have a good government, in order to prevent regulatory teams in the actual regulatory process be bought. To reduce the regulatory costs of the central government, we must actively use modern technology and management methods, establish and improve housing prices nationwide monitoring system, efforts to improve information on the level of work; should give full play to the supervisory role of the people, to establish a multi-regulatory networks and regulatory channels. In 2011 the central government began in the real estate market regulation policy implemented interviews and accountability of local officials, but the price is not enough tough, our latest data from the National Bureau of July, the real estate prices continue to rise, indicating that such administrative means no efforts to curb housing prices. We must increase the person’s responsibility of local government administrative sanction violations, and include individual performance into evaluation; thorough investigation of unfair trade practices to regional prices soaring to prevent collusion and big money-making phenomenon.
Real estate prices are rising, along with the increasingly high land prices, the two influence each other, can be seen from the actual situation. The local government is also more dependent on land finance, debt repayment of part of the local government is highly dependent on the land revenue. So that the central government and local governments to more serious conflicts of interest, lack of control policies implemented in the real estate market place. As mentioned earlier, many scholars’ study showed that the root cause lies in our land financial allocation between central and local governments uncoordinated. Since 1994 China’s implementation of the tax system, the proportion of fiscal revenue to total fiscal revenue of local governments decline, but the opposite of local government expenditure did not change, which led the game, and increased the local government to the extent of reliance on land revenue. Therefore, under the price control policy, be sure to lift the local government’s financial constraints, can ease the tension by local fiscal reform of the tax system and central government funding to promote a balance of property rights and powers. True to a certain extent in order to curb the realities on the real estate market prices soaring.
But Zhang Wuchang [
What kind of intrinsic motivation mechanism can lead to abnormal development of China’s real estate market that housing prices only rise and speculation prevails? What is the best price regulation? This is the challenge for policy-making and decision science. Many scholars believe that income, land, population and other economic factors drive the increase of housing prices; some scholars believe that the land policy, auction policy, the tax system and regulatory policy induce high price; the few scholars are aware of the speculative buying, and advocate the use of tax suppression speculation. Tax pilot was held in Shanghai, Chongqing, Hangzhou and other places; but because of conflicting interests in policy implementation, progress is not smooth. This paper argues that the root cause of the soaring high speed of real estate market prices is a serious imbalance between supply and demand, serious speculation. Tax policy can effectively curb speculative demand, but the policy has not been effectively implemented. The government and relevant departments at all levels need to analyze reasons for the existence of the contradiction of supply and demand structure, and develop policies to solve China’s housing problem fundamentally.