The geographical spillover effect of a house purchase deregulation policy: evidence from a quasi-experiment in China

Purpose In this paper, we quantitatively test the impact of removing home purchase restrictions (HPRs) on the second-hand housing market in neighboring regions to study the potential geographical spillover effect of real estate regulations. Design/methodology/approach We use a policy that removes HPRs in a sub-district of Suzhou City, China, as a quasi-experiment to investigate the effect of a house deregulation policy on sales of second-hand houses in an area not directly impacted by the policy but geographically nearby. The geographical proximity between the regions considered and the unanticipated nature of the policy help to reduce the influence of omitted factors in our difference-in-differences analyses. Findings We find that listing and transaction prices in the area surrounding the deregulated district significantly decrease following the introduction of the policy, while the number of houses sold significantly increases. The impact of the policy on prices diminishes as the distance from the deregulated district’s border increases. With the cancellation of the purchase limit in a sub-region, residents who were not previously eligible to buy houses become eligible to buy properties in the deregulation-targeted district. Such a change reduces future demand for properties in the neighboring area, which motivates sellers to reduce their listing prices and accept lower transaction prices based on their updated demand belief. Originality/value We contribute to the literature by utilizing micro-level transaction data to study the emerging trend of home purchase restrictions being lifted in China and by examining the geographical spillover effects on nearby regions.