The impact of informality on the housing sales and rental market in China : empirical evidence from Beijing

Abstract

Informal housing refers to housing units without complete ownership rights, which means lack of or unclear rights to exclusive use, derive income from or alienate the housing units. It is estimated that more than 250 million people in China are living in informal housing units. This thesis investigates how incomplete property rights affect people’s valuation of informal housing.

I begin with an exploratory study on the legal status of informal housing by analyzing the judgements of court cases involving informal housing. The judgements suggested that the courts did not totally deny the rights of informal housing owners despite the absence of legal documents that prove their ownership of the informal housing units. However, full alienation rights were mostly rejected by courts such as the sale of informal housing units to “outsiders” who were not eligible to buy the housing unit, were considered void. Despite the rights to alienate are not recognized by courts, the act of selling informal housing to “outsiders” is not considered a crime, which fostered an actively transacted informal housing market. The existence of this market makes quantitative empirical analysis possible for this study.

Although the courts were reluctant to judge the legal status of the informal housing and regard this as “historical issues”, local authorities may exercise their power to determine which informal housing units is deemed illegal and must be demolished with little or no compensation to the owners. This is a risk that all informal housing owners have to bear. However, eviction of informal housing is rare (Liu, Yi, & Zheng, 2018), especially for the old ones since the rules governing housing development were not that clear at the beginning of the housing reform in China. The rules are much clearer now. Today, development of new informal housing is much more difficult than before.

The explorative study suggests that the value of informal housing should be lower than that of formal housing primarily due to (1) the lack of alienation rights and (2) risks of all property rights being denied when judged by authorities as illegal. These insights were further developed and formalized as refutable hypotheses, which were tested with data from Beijing.

The difference in difference (DID) empirical analysis shows that the discount of sales prices of informal housing to that of formal housing ("Sales Price Discount") is significantly larger than that of the corresponding discount in rental values. Since the tenants of rental units have no alienation rights in both formal and informal housing, the discount is smaller. The result suggests that lack of alienation rights as a main source of the Sales Price Discount.

I tested the risk of demolition as a source of Sales Price Discount by examining the impact of age and proximity to city center on informal housing rents and prices. Since the development rules were less clear in the old days and that eviction of an established informal housing development would cause social and political problems, older informal housing units are less likely to be demolished and thus a smaller Sales Price Discount. The implication is that the negative impact of age on the prices of informal housing should be smaller (less negative) than that of formal housing. However, no such pattern should be observed in the rental market as tenant are much less affected by the risk of demolition. The empirical results show a reversal of the age effect on sales price for informal housing while the age effect on rent is even more negative for informal housing. This result also suggests that the use-value of informal housing depreciates more quickly than that of formal housing, which is likely to be a result of lack of investment on building maintenance for informal housing units.

Informal housing in the city center is more noticeable and thus may be more likely to be demolished. The implication is that the negative impact of distance to the city center (or positive impact of proximity to city center) on housing prices is weaker for informal housing. The empirical results in the sales market are consistent with this implication. No such pattern can be observed in the rental market. The empirical results are robust across different model specifications and statistical data matching methods adopted to ensure like with like comparison between formal and informal housing units.

Consistent with the qualitative observations in the exploratory study, the quantitative empirical results from the sales and rental markets of formal and informal housing in Beijing suggest that the main sources of Sales Price Discount are lack of alienation rights and the risk of demolition by local authorities. There are different possible reasons for the observed Sales Price Discount, lower construction quality (no approval by authority is needed), incomplete exclusive rights, incomplete rights to derive income etc. The empirical results in the study show that they are much less important compared with the two main reasons identified in this study. The results contribute to our understanding on why informal housing are transacted at a discount to formal housing as well as contribute to the current theoretical understandings on institutions and rent dissipations. Not only it is found that variations in property rights can lead to differences in resource allocations but also the variations in the perceptions of the likelihood of enforcements can result in differences in rent dissipations that can be measured in value terms Meanwhile, it is also found that not all the right defection can cause rent dissipations as some rights, though denied by formal institutions, are in fact enforced by formal institution organizations.