Can a House Resale Restriction Policy Curb Speculation? Evidence from a Quasi-Natural Experiment in China

Speculative opportunity is commonly defined as the chance for agents to resell an asset at a higher price. We use a two-stage city-level resale restriction policy implemented in China as an exogenous and negative shock on the speculation chance in the second-hand housing market to show that a sudden reduction in the opportunity for speculating on the housing market directly causes a significant decrease in property transaction prices. By employing a baseline difference-in-differences model and supplementing it with several robustness tests, we find that the speculative component of housing prices, which is restricted by the policy, accounts for around 10% of the variation in those prices. Our empirical design involving a quasi-natural experiment allows us to avoid the influence of relevant omitted variables when studying the causal effect of speculation on housing prices. Our study is related to a fast-growing literature on policy evaluation in the Chinese housing market and is particularly important to real estate regulators as it indicates the effectiveness of the aforementioned resale restriction policy