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Journal of Urban Economics 47, 6187 2000.

Article ID juec.1999.2133, available online at http:rrwww.idealibrary.com on

Housing Choice Behavior of Urban Workers in Chinas


Transition to a Housing Market
Yuming Fu1

Department of Real Estate and Urban Land Economics,


Uni ersity of Wisconsin, Madison, Wisconsin
E-mail: yfu@bus.wisc.edu

David K. Tse1

School of Business, The Uni ersity of Hong Kong, Hong Kong

and

Nan Zhou1

Department of Marketing, City Uni ersity of Hong Kong, Hong Kong

Received July 29, 1998; revised February 23, 1999

Restoring demand for commodity housing is crucial for the success of housing
reform in previously centrally planned economies; yet weaning workers away from
publicly subsidized housing is a difficult task. Taking advantage of a unique survey,
we show that the intention to buy commodity housing by Chinese urban workers is
sensitive to various incentives, including housing mismatch, liquidity constraints,
risk attitudes, access to publicly subsidized housing, and commodity housing prices.
Our probit estimates indicate that the access to publicly subsidized housing is at
least as important as the affordability of commodity housing in discouraging private
home ownership. 2000 Academic Press
Key Words: housing choice; housing reform; economic transition; China.

I. INTRODUCTION
In a centrally planned economy, as China was until recently, housing was
not a commodity, but merely as a social obligation to be met by adminis-
trative organizations, state enterprises or municipal governments Re-
1
We thank the seminar participants at the University of Southern California and two
anonymous referees for helpful comments. Zhou and Tse acknowledge the financial support
provided by the Research Grant Council CERG CityU 1176r97H.. Xiao Ming provided
excellent reasearch assistance. All authors contributed equally.

61
0094-1190r00 $35.00
Copyright 2000 by Academic Press
All rights of reproduction in any form reserved.
62 FU, TSE, AND ZHOU

naud w18, pp. 12471248x.. Before the current housing reform, urban
households in China had little choice in their housing, which was provided
by the state for a nominal charge. Housing reforms started in 1979 and
were initially aimed at alleviating the extreme shortage of housing by
decentralizing housing investment decisions and funding. Local experi-
ments in housing privatization were encouraged since the mid-1980s as
fiscal expenditure on urban housing subsidies soared from 2.03% of GDP
in 1980 to 4.21% in 1988. with the rapid expansion in publicly subsidized
housing built by urban work units World Bank w22x; Wong, Heady, and
Woo w23x.. In addition to gradual adjustment in public housing rents and
selling of public housing stocks, commodity housinghomes built for sale
at market priceshas also been promoted as part of the privatization.
Although significant progress has been made in privatizing housing re-
sponsibilities, weaning urban workers away from publicly subsidized hous-
ing remains a major challenge for China Yatsko w24x..
Whereas Chinese housing reforms have followed gradual steps in transi-
tion to a housing market, scholars like Buckley, Hendershott, and Villani
w4x consider rapid housing privatization to be essential for restoring con-
sumer demand in a housing market. The Chinese experience, however,
offers a valuable opportunity to study consumer behavior in a housing
market when a socialist housing legacy remains. The purpose of this paper
is to present an empirical study of housing choice behavior of urban
workers in Chinas transition to a housing market. In particular, we show
supporting evidence that the continuation of publicly subsidized housing
holds back the demand for commodity housing. We do so with the benefit
of a unique data set collected from a recent consumer survey carried out
at factories in a number of major Chinese cities. The data allow us to study
individual workers intentions to buy commodity housing conditional on
their personal and family circumstances that may affect their housing
choices, as well as on their access to subsidized housing.
There have been many studies on various aspects of Chinese housing
reforms. Among the studies based on survey data, Fleisher, Yin, and Hills
w8x show a lack of labor compensation differential in relation to the
housing cost born by Chinese workers. Pudney and Wang w17x examine the
distribution of housing resources, using the household survey data from
two Chinese provinces collected between 1986 and 1990; they find a
positive relationship between the access to housing resources and house-
hold income. Zax w25x studies the relationships between family characteris-
tics and dwelling sizes in the household-built and state-owned sectors and
finds that the relationship differs dramatically between the two sectors.
Lim and Lee w13x and Chen and Coulson w5x both use aggregate data and
find housing expenditure to be positively related to regional income level;
HOUSING CHOICE AND CHINAS TRANSITION 63

Chen and Coulson w5x, however, find housing expenditure to be largely


independent of the subsidized prices.
These empirical studies, while revealing much about the public sector
allocation of housing resources in the Chinese economy, provide few
insights into the housing choice behavior of Chinese consumers as the
trend toward housing privatization gathered pace and commodity housing
became widely available in more recent years. The impact reform policies
have on consumer choices in the housing market is now a central issue for
a successful transition to a housing market. The current paper makes a
contribution shedding light on how Chinese consumers trade off various
constraints and incentives in making home purchasing decisions. Our
empirical model also helps us to assess the potential impact of housing
reform policies on the demand for commodity housing.
After briefly reviewing both the housing reform and the recent trend in
demand for commodity housing in Chinese cities Section II., we present a
conceptual model relating individuals motivation to purchase commodity
housing to their housing mismatch and tenure transition incentives Sec-
tion III.. The survey and the data are described in Section IV, followed by
the specification of our econometric model in Section V. The empirical
results and implications are discussed next in Section VI, and Section VII
concludes the paper.

II. HOUSING REFORMS AND THE DEMAND FOR


COMMODITY HOUSING IN CHINESE CITIES
In the early 1950s, most of the private housing stock in Chinese cities
was nationalized and taken over by local public housing bureaus. New
urban housing construction was incorporated within the central planning
and largely funded by the state capital investment budget. Urban housing
was allocated in connection with official urban employment, and housing
operation was heavily subsidized by urban enterprises and governments,
with workers paying minimal rent. Urban housing investment was seriously
neglected during the economic and political turmoil of the 1960s and
1970s. By 1978, the per capita housing floor space in Chinese cities was
only 3.6 square meters State Statistical Bureau w19x.. Reforms of the
urban housing system started in 1979. Following an initial aim to solve the
problem of the extreme shortage of urban housing by decentralizing
housing investment, the focus of housing reform shifted to the privatiza-
tion of housing responsibilities, which became indispensable in the mid-
1980s for the reform of state-owned enterprises and government fiscal
management.2

2
Tolley w20x reports on the challenges in introducing market housing in Chinese cities.
64 FU, TSE, AND ZHOU

With respect to housing investment, urban work units were given more
discretion to allocate their capital budget and to raise extra capital funding
from their employees for housing development. Small work units were able
to pool their funds and participate in housing projects organized by
municipal governments. In addition, private housing construction was also
allowed in cities. The share of housing investment financed by the state
budget thus fell sharply, from over 90% before reforms to 16% in 1988.
State-owned enterprises financed 52% of housing investment in 1988,
urban collective enterprises and local governments financed 6% each, and
private sources financed the remaining 20% World Bank w22x.. The
decentralization of housing investment quickly led to a housing construc-
tion boom. Housing investment as a proportion of GNP rose from an
average of 1.5% before reforms to over 7% during the 1980s World Bank
w22x.. As a result, per capita housing floor space rose to 5.2 square meters
by 1985 and to 8.5 square meters by 1996 State Statistical Bureau w19x..
In 1988, the Chinese constitution endorsed private property rights in
urban land, and long-term land leases were granted for private real estate
development. The real estate industry has grown rapidly since then. In
1996, sales of buildings in real estate developments amounted to 145
billion yuan, or 5.9% of total retail sales China Economic Yearbook w6x..
Housing accounted for 86% of the building floor area sold.
Table 1 lists the urban housing completion in work-unit-funded housing
projects and commodity housing sales from real estate development. Sales
of commodity housing columns 7 and 8. accounted for no more than 21%
of total annual housing completion in cities column 1. before 1993 and
rose to around 25% in recent years. Urban work units, however, purchased
most of the commodity housing sold, although individuals share of the
commodity housing market columns 9 and 10. increased from 14% in
1986 to slightly over 50% in recent years. Accumulation in the unsold
commodity housing inventory is apparent, given persistently low sales
relative to commodity housing completion columns 5 and 6. in recent
years. Table 1 reveals that, although housing investment and commodity
housing supply has risen significantly since the early 1980s, the commodity
housing market has remained a minor channel for urban residents to
acquire new homes. On the other hand, publicly owned3 urban work units
have continued to play a major role in providing housing as an employ-
ment benefit to urban residents, either through housing construction or
through acquisition in the market.
In a survey of Beijing residents in 1997 China Commercial Times,
October 8, 1997.,4 76.8% of respondents reported living in public rental

3
Owned by the state or by urban collectives.
4
Zhong Hua Gong Shang Shi Bao, a Beijing-based newspaper.
HOUSING CHOICE AND CHINAS TRANSITION 65

TABLE 1
Housing Completion and Sales in Urban Areas

Year 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

1986 109.87 9.74 18.35 2.56 14%


1987 87.81 8.84 23.77 4.27 18%
1988 84.77 9.01 25.49 7.23 28%
1989 70.60 7.02 24.91 8.05 32%
1990 65.97 6.36 25.45 7.31 29%
1991 140.00 73.82 6.39 57% 27.45 19% 9.27 34%
1992 178.26 86.70 7.53 53% 49.68 28% 38.12 21% 14.56 38%
1993 209.00 97.42 11.30 52% 72.54 35% 60.35 29% 29.43 49%
1994 241.07 109.86 11.29 50% 113.68 47% 61.18 25% 33.45 55%
1995 270.00 112.41 32.86 54% 122.19 45% 67.87 25% 35.12 52%
1996 300.00 116.72 29.66 49% 121.18 40% 68.98 23% 36.67 53%

1. Total housing completion in urban areas million sq m.. Source a. for 19921995 and
c. for 1991 and 1996. The number may exceed the sum of column 2., 3., and 5., the
residual being housing completion in the informal housing sector.
2. Housing completion for state-owned work units million sq m.. Source b..
3. Housing completion for collective-owned work units million sq m.. Source b..
4. Housing completion for publicly owned work units as proportion of total completion:
w2. q 3.xr1..
5. Commodity housing completion million sq m.. Source a..
6. Commodity housing completion as proportion of total completion: 5.r1..
7. Commodity housing sold million sq m.. Source b..
8. Commodity housing sold as proportion of total completion: 7.r1..
9. Commodity housing sold to individuals. Source b..
10. Commodity housing sold to individuals as proportion of total sales: 9.r7..
Sources: a. China Economic Yearbook w6x, various years; b. State Statistical Bureau w19x;
c. Liu w14x, Table 2.

housing46.8% provided by work units and 30% by local public housing


bureaus; 13.7% reported living in inherited private housing, 2.8% renting
privately, and 3% having bought partial property rights in public housing.
Furthermore, 42.7% of respondents reported having moved into new
housing during the 1980s and another 26.7% having moved during the
1990s. Consistent with the overall picture depicted in Table 1, the survey
revealed little movement into private home ownership in Beijing, despite
the fact that most residents had moved into new housing.
Recent directions in the privatization of housing responsibilities were
outlined in a 1994 central policy document, The State Council Decisions on
Deepening Urban Housing Reform. The document called for four measures:
i. the establishment of housing provident funds to be managed by munici-
pal governments; ii. further rises in public housing rents, to 15% of
household income by year 2000; iii. sale of existing public housing to
66 FU, TSE, AND ZHOU

TABLE 2
Ratio of Housing Expense to Total Living Expenditure and Real Urban Wage Index

Year 1992 1993 1994 1995 1996

Ratio* 2.14% 2.51% 2.77% 2.93% 3.17%


Real urban wage index 100 107 115 120 124

*PRC Yearbook 1997.



China Statistics Yearbook 1997 w19x.

urban workers on a cost recovery basis; and iv. a speed-up of the


development of low-income commodity housing. Whereas work units had
the incentive to sell state housing to employees substantially below cost 5
when they could, the effort to raise rent has been poor. Although the
average nominal rent in all cities tripled to 0.95 yuan per square meter per
month between 1992 and 1995 China Economic Yearbook w6x., the adjust-
ment was modest in view of the rapid increase in urban wages during the
period. As Table 2 shows, the rental expense was still only slightly above
3% of household total living expenditure in 1996, up from 2.1% in 1992,
while the real wage rate rose 24% during the period.
The experience of housing reform in China illustrates some of the
difficulties with a gradual transition to a housing market pointed out by
Buckley, Hendershott, and Villani w4x. First, rental increase necessary for
privatizing the housing responsibility is difficult to accomplish. For the
target rental level set in the State Council document to be met, rental
adjustment must be substantially faster than wage growth, which would be
politically unpopular even if the wage rate were to grow rapidly. Second, it
would be impossible for administrators to determine and enforce a mar-
ket-clearing rent level. Third, as long as public rents remain below the
market-clearing level, the demand for private home ownership will remain
low, and the publicly owned urban work units, faced with soft budget
constraints, will continue to find ways to shift public resources to fund
subsidized housing for their employees.
As of 1996, over 93% of urban workers in China were employed in the
public sector, including state-owned units 73.8%. and urban collective-
owned units 19.9%.; the remaining urban work force 6.3%. was em-
ployed in mixed ownership units and the private sector State Statistical

5
According to China Economic Yearbook 1995, p. 311. w6x, in Zhejiang province one-third
of the public housing stock had been sold to tenants by the middle of 1994. The average price
in Hangzhou, the capital city of the province, was 220 yuan per square meter, compared with
the average building cost of 702 yuan per square meter at the time.
HOUSING CHOICE AND CHINAS TRANSITION 67

Bureau w19x.. The extent of employment compensation subject to soft


budget constraints can be indicated by the extent of implicit employment
income in the urban wage structure. The ratio of average subsidies and
allowances to average wage in 1996 was 0.23, 0.15, and 0.12 for state-owned
units, collective-owned units, and non-public-owned units, respectively.
The relative importance of subsidies and allowances actually increased for
state-owned units but substantially decreased for the non-public-owned
units between 1990 and 1996 China Economic Yearbook w6x.. Expansion
in new work-unit housing was largely responsible for the growth in implicit
employment income among publicly owned work units.
There are two other major obstacles to the growth of consumer demand
for commodity housing, namely high prices relative to average income of
urban households and the lack of mortgage lending to individuals. The
average commodity housing price in all cities in 1996 was 1667 yuan per
square meter. A 60-square meter flat would cost a typical urban house-
hold, with 3.2 people and 4844 yuan annual income per capita PRC
Yearbook 1997., 6 12 years of income. In large cities like Beijing, an average
flat on the market could cost over 9 years of income of a typical household
Liu w14x..6 Commodity housing has been made unaffordable to a large
extent by the lack of mortgage loans to consumers. In 1997, the five big
commercial banks in China extended 10 billion yuan in new loans for
residential housing. Low-interest-rate mortgages provided by municipal
housing provident funds outstanding at the end of 1996 totaled 4.2 billion
yuan China Economic Yearbook w6x.. The amounts were small compared
with the 53.3 billion yuan sales of commodity housing to individuals in
1996.
The same survey in Beijing mentioned above found that the 46.1% of
those interviewed would rather choose to continue to live in their public
rental housing, compared with only 12.9% who would be willing to pur-
chase commodity housing; the rest of those interviewed favored publicly
provided housing with various equity participation options.7 Clearly there
are major obstacles to overcome to persuade Chinese urban residents to
accept the concept of private home ownership. To what extent is the
demand for private home ownership held back by affordability and to what
extent by distortions in the user cost of publicly provided housing? The
rest of the paper attempts to shed light on these questions.

6
Liu w14x also discusses various institutional factors preventing housing market clearing.
7
The three semi-private housing options are public housing with private user rights, partial
property rights in work-unit provided housing, and employeeemployer jointly funded hous-
ing development. These options are cheaper than commodity housing but are subject to
restrictive and ambiguous private property rights.
68 FU, TSE, AND ZHOU

III. HOUSING DECISIONS BY CHINESE URBAN


HOUSEHOLDS
Let us consider a Chinese urban household contemplating the prospect
of buying a home from the commodity housing market. Such a prospect
would be determined by two related considerations: one has to do with
housing consumption adjustment and the other with tenure choice. In the
absence of a market for public housing, a household experiencing housing
mismatch would either have to postpone its housing adjustment in the
hope of obtaining a new home through public housing channels or move
into the private housing market. The major option in the private housing
market is to purchase commodity housing. For existing tenants, purchasing
commodity housing involves a tenure transition decision. In addition, the
tenure transition could be motivated by investment objectives. Below we
consider the factors that may affect housing adjustment and tenure transi-
tion decisions.
The decision to buy commodity housing can be due to consumption
motives, where a household decides to move as its current housing con-
sumption becomes mismatched with its housing demand see Weinberg,
Friedman, and Mayo w21x.. The demand for housing services typically
increases with income. Mismatch widens, therefore, as household income
rises relative to the level of housing services currently consumed. Mis-
match would be likely to occur if household income has increased recently
or is expected to rise, or if the household head expects to switch hisrher
job, but would be less likely if the household has recently moved to its
current home.
With respect to the tenure choice decision, existing literature has
focused on three major factorsdifferential user cost of housing between
renting and owning, liquidity constraint due to down payment require-
ments, and investment risks see, for example, Brueckner w3x, Henderson
and Ioannides w11x, and Fu w9, 10x.. The literature maintains that the
likelihood of a household owning its home increases when i. the economic
cost of housing services provided by owning is lower relative to that
provided by renting, ii. household liquidity rises, and iii. the investment
motive is stronger.
In the context of Chinese housing reform, the housing cost differential is
closely related to the legacy of the socialist housing system. Transition to
private home ownership involves lost opportunities to receive housing
subsidies, including an ongoing rent subsidy as well as opportunities to
obtain a new subsidized home. Ongoing rent subsidy is enjoyed by those
who live in public housing, whether it is owned by work units or local
public housing bureaus. To the extent that inherited private housing is not
fully marketable, because of uncertain property rights and high transaction
HOUSING CHOICE AND CHINAS TRANSITION 69

costs, the opportunity cost of housing services provided by such housing


would also be below market rent. In contrast, those renting their home
privately or living in commodity housing would receive no rent subsidy.
Therefore, there is a gap in the cost of housing services between private
home ownership, on the one hand, and public housing tenancy or inherited
private housing, on the other. The gap is absent, however, between private
home ownership and private tenancy.
There are several ways to obtain new subsidized homes. Residents
renting from local public housing bureaus or in inherited private housing
receive housing compensation either in kind or in cash when their home is
affected by urban redevelopment projects; such housing compensation
typically makes the residents better off. The major source of subsidized
housing, however, is from publicly owned work units. As discussed in the
last section, public-owned urban work units continue to play a major role
in providing subsidized housing to employees, as the incentive to supple-
ment the regulated wage with in-kind benefits has remained strong. In the
private sector, as wage rates are not regulated, employers prefer to pay
premium wage rates in lieu of housing benefits to attract employees. Thus
the opportunity cost of moving into commodity housing could be affected
by the employment status of household members. Typically, those working
in publicly owned work units, especially in large state-owned units with
more liberal housing benefits Bian et al. w2x., would have more to lose
upon moving into commodity housing. That subsidized housing continues
to be provided in publicly owned work units but not in privately owned
work units gives rise to a free-rider incentive, manifested by the tendency
for families to rely on the member working in a publicly owned unit for
housing.
The opportunity cost of moving into commodity housing would be
lowered with the privatization of the existing public housing stock, which
would separate housing welfare transfer from residents choice regarding
the purchase of commodity housing. Buckley, Hendershott, and Villani w4x
argue for giving away existing public housing stock to residents as a way of
solving both the affordability and the disincentive problems that prevent
the growth of consumer demand for commodity housing.
Based on the above discussion, we can summarize our model of housing
choice behavior by workers in Chinese cities using several sets of hypothe-
ses. These hypotheses provide the basis for the specification of our
econometric model for estimating the determinants of individuals inten-
tions to purchase commodity housing. All hypotheses listed below are
conditional on other things being equal.

H1. Housing mismatch and housing consumption motives: A house-


hold subject to greater mismatch between its demand for housing services
70 FU, TSE, AND ZHOU

and its current housing consumption would have a stronger intention to


move and thus is more likely to consider buying commodity housing.
H2. Tenure choice decision and the effect of liquidity constraints
and risk attitudes:
H2.1 Households subject to less liquidity constraint would have a
stronger intention to buy commodity housing.
H2.2 Households that are less risk averse would have a stronger
investment motive and thus a greater intention to purchase commodity
housing.
H2.3 Households that are more confident economically would
have a stronger investment motive and be more likely to purchase com-
modity housing.
H3. Tenure choice incentives associated with employment and
housing status:
H3.1 Differential user cost: Households paying market rent would
show a stronger intention to move into commodity housing compared with
those paying below market rent.
H3.2 Housing privatization: Workers in work units attempting to
privatize public housing would show a stronger intention to buy commodity
housing.
H3.3 Opportunity cost in housing benefit: Workers in larger
state-owned work units would have a weaker motivation to purchase
commodity housing.
H3.4 Free rider incentive: Compared with households employed
solely in publicly owned work units, households with one spouse working in
a privately owned work unit and one in a publicly owned unit would not
show a stronger incentive to buy commodity housing, but households
employed solely in privately owned work units would.
Hypothesis H1. regarding the effect of housing mismatch on home
purchasing intention requires little further elaboration and is consistent
with the empirical literature on household mobility in housing markets
Weinberg, Friedman, and Mayo w21x.. The second group of hypotheses
under H2. derives from the maintained hypotheses in the tenure choice
literature. Theoretical models Brueckner w3x and Fu w10x. indicate a
positive effect of household liquidity on home ownership demand. Fu w9x
shows that home ownership demand increases when risk aversion is lower
and expected housing investment return is higher. These theoretical pre-
dictions are borne by empirical evidence from market economies Jones
w12x.. While our empirical results regarding H1. and H2. would provide
an interesting comparison of the housing choice behavior between con-
HOUSING CHOICE AND CHINAS TRANSITION 71

sumers in China and in market economies, our main objective is to


examine the hypotheses under H3. with respect to the effect of adverse
incentives due to the presence of a socialist housing legacy. Our empirical
estimates with respect to these institutional housing variables allow us to
assess the potential impact of housing reform policies on the demand for
commodity housing.

IV. THE SURVEY AND DATA


The data used in this study were collected in a large-scale survey
organized by two of the authors in 1997. The survey was designed to study
various consumer issues, including housing behavior, in China during its
transition to a market economy. The survey participants were manufactur-
ing firms and their employees in nine major Chinese cities of different
levels of economic development. The cities were selected to represent a
wide range of income levels; Table 3 lists the income and housing market
conditions in these cities, where average wage income and average com-
modity housing price appear to be positively correlated. The firms sur-
veyed cover four types of ownership structures; they are state-owned,
collective-owned, joint-stock, and foreign-joint-venture, respectively. A to-
tal of 3964 employees were interviewed, divided equally among the 180
firms surveyed, which, in turn, were divided equally among the nine cities
and four types of ownership. A more detailed description of the sampling
and data collection process is provided in Appendix I.
State-owned and urban collective-owned work units are referred to as
publicly owned work units. Joint-stock work unitslargely restructured
former large state-owned enterprisesare also known as mixed-ownership

TABLE 3
List of the Cities Surveyed and Their Economic Conditions

Average annual Annual growth Per capita living Average price of


wage income per in wage floor space commodity housing
City employee 1994. 199094. sq m. 1993. yuanrsq m. 1994.

1. Beijing 6707 25.69% 8.44 4739


2. Shanghai 7571 26.42% 7.28 2638
3. Guangzhou 8831 25.40% 8.89 4805
4. Nanjing 6095 25.85% 7.61 2918
5. Wuhan 4731 21.70% 6.48 1682
6. Chengdu 5235 22.38% 7.94 1749
7. Xian 4360 18.62% 6.36 1874
8. Changchun 4618 22.57% 6.51 1668
9. Guiyang 3947 18.01% 7.29 1206

Source: Urban Statistical Yearbook of China, various years.


72 FU, TSE, AND ZHOU

TABLE 4
Equity Structure of Different Ownership Types

Ownership type
no. of reporting cases. Ownership of equity capital Average share

State-owned State-owned 96.68%


793. Collective-owned 0.00%
Urban collective-owned State-owned 5.78%
838. Collective-owned 88.78%
Joint-stock State-owned 59.78%
815. Collective-owned 11.06%
Foreign-joint-venture State-owned 27.68%
968. Collective-owned 7.17%

TABLE 5
Work-Unit Size Number of Workers. and Housing Benefits

Work unit responsible for housing?


Ownership type Yes No Total

Average size 1203 579 1091


State-owned Percentage of the type 82.14% 17.86% 100.00%
Average size 274 258 267
Urban collective-owned Percentage of the type 55.44% 44.56% 100.00%
Average size 2039 1837 1981
Joint-stock Percentage of the type 71.14% 28.86% 100.00%
Average size 760 184 530
Foreign-joint-venture Percentage of the type 60.00% 40.00% 100.00%

units. Foreign joint ventures are largely funded by nonpublic capital. Table
4 lists the equity structure of these four types of work units; it shows that
all types of work units, except for foreign joint venture enterprises, are
largely publicly owned in nature.
Table 5 shows that the average size of joint-stock enterprises is the
largest, followed by state-owned work units, and that the average size of
the collective-owned units is the smallest. Table 5 also shows the percent-
age of each type of work units that indicated being responsible for
employee housing.8 State-owned units and joint-stock units were more
likely to be responsible for housing. For state-owned and foreign joint
venture units, the average size of those providing housing is much larger
than that of those not providing housing.
8
It is not necessarily the case that the work units reporting not being responsible for
employee housing never provided housing to employees. About a quarter of the workers in
our sample at such work units were living in housing provided by their own work unit.
HOUSING CHOICE AND CHINAS TRANSITION 73

TABLE 6
Number of Observations by Housing Tenure and the Type of Work Unit

Ownership types
State- Collective- Joint- Foreign- Subtotal % of
Housing tenure types owned owned stock joint-venture grand total.

Self-owned work-unit housing 1 5 3 0.23%


Self-owned commodity 42 41 74 49 5.20%
housing
Commodity housing 9 9 16 12 1.16%
not self-owned.
Owned by respondents 363 283 389 274 33.02%
work unit
Owned by spouses work unit 124 130 98 128 12.11%
Owned by the work unit of 172 143 166 214 17.53%
parents or children
Owned by public housing bureau 148 191 115 153 15.31%
Rented privately 40 33 26 41 3.53%
Traditional private housing 82 158 91 109 11.10%
Others 10 4 11 7 0.81%
Grand total 991 992 991 990 3964

Table 6 shows the housing tenure distribution among the 3964 workers.
About 6% lived in commodity housing over four-fifths of them were
owners.. About 12% had invested, but were not living, in commodity
housing. About 78% occupied public housing provided by work units or
local governments. Eleven percent lived in traditional private housing or
household-built housing., largely inherited from previous generations.
About 3.5% rented their homes privately. Finally, a few interviewees,
accounting for less that half a percent of our sample, purchased work-unit
housing.
The workers participating in our survey were asked to indicate their
intention to purchase commodity housing in the next 3 years,9 ranked on a
five-category scale from 1 impossible. to 5 definitely possible.. Existing
research on consumer behavior largely confirms that purchasing intention
can be regarded as a valid measure of action tendency see Bagozzi and
Baumgarten w1x, for example., especially for high-involvement purchase
decisions characteristic of home purchasing McQuarrie w16x..

9
Ideally we would like to know the respondents reason for purchasing commodity housing.
Unfortunately, such information was not collected in our survey. Nevertheless, we believe the
majority of the respondents would consider buying commodity housing as their home rather
than as an income property. Our empirical results appear to be consistent with our belief.
74 FU, TSE, AND ZHOU

V. THE ECONOMETRIC MODEL


Given our ordered response data with respect to survey participants
intention to buy commodity housing, we adopt an ordered probit model
see Maddala w14x. for econometric analysis. Let X be a vector of n
variables indicating a respondents housing mismatch, liquidity constraints,
risk attitudes, and other incentives or disincentives to purchase commodity
housing. We specify a respondents motivation to buy commodity housing,
y*, to be a linear function of X plus a random error; that is, y j* s q X j
q j , where subscript j identifies the respondent, is an n = 1 vector
of coefficients, is a constant, and j is an i.i.d. normal random variable.
y* is unobserved but positively correlated with the ordered response
regarding the intention to buy. Thus, for responses ranked by category k,
ranging from k s 1 impossible. to k s 5 definitely possible.,
Probability of category k response
s prob ky 1 F y* F k .
s prob ky 1 y y X F F k y y X . , 1.
for k s 1, . . . , 5, with 0 s y and 5 s q, respectively, where ky1 is
the threshold motivation level for a response to be in category k. The
parameters k y , k s 1, . . . , 4, and can be estimated by maximizing
the joint probability of the responses in a given sample.
We consider the following explanatory variables to be included in X.
The definition of these variables is given in Appendix II, and the role of
these variables in housing choice decisions is presented in Figure 1.
Housing mismatch is measured by variables INCOME family gross
monthly income level., NRMPP number of rooms, excluding bath, kitchen,
storage, and patio, per person., CHNGINC current family income relative
to that a year before., LUXUR owning expensive clothing in the house-
hold., CHNGJB prospect of changing work unit., and NEWHM newly
moved into current home.. According to hypothesis H1., the demand for
moving increases with INCOME relative to NRMPP. A large CHNGINC
would cause housing mismatch and enhance household liquidity as well,
increasing the intention to move.10 Consumption of expensive clothing, a
common luxury household item, could reflect a relatively higher level of
permanent income; it could also indicate a stronger preference for current
consumption over saving. Thus LUXUR would be positively correlated
with the demand for housing services, and given the current level of
housing consumption, would be positively correlated with the demand for
10
Although a large negative income shock would also cause housing mismatch if the shock
is expected to last, the liquidity constraint effect would likely dominate the consumption
motives.
HOUSING CHOICE AND CHINAS TRANSITION 75

FIG. 1. A schematic model of housing choice behavior.

housing adjustment. A high CHNGJB would indicate anticipated mismatch


in housing location; alternatively, a high CHNGJB signals the respondents
high mobility in the labor market, which would enhance the respondents
permanent income.
The household liquidity constraint would be relaxed with a recent rise in
family income, i.e., a large CHNGINC. In addition, a large CHNGSVN
current saving relative to that a year before. indicates an improvement in
liquidity, making commodity housing more affordable. The risk attitude of
the respondent is indicated by STKINV owns common stocks.; those who
invested in the stock market would be more tolerant of investment risks.
Conversely, those who attach a high value to job security, JOBSEC
importance of job security when looking for a new job., tend to be more
risk averse and hence would have weaker investment motivation. More-
over, the investment motive would be enhanced by the respondents
economic confidence. We consider four variables in this respect: EPCITY
expectation for the economic conditions in the city in a year., EPFIRM
expectation for the profitability of the firm in a year., EPFMLY expecta-
tion for the economic conditions in the family in a year., and FMLYSDL
76 FU, TSE, AND ZHOU

perceived standard of living of the family compared with the average in


social circle..
The cost as well as the incentive to acquire commodity housing could be
affected by the respondents human capital, social connection, and age.
These variables are represented by CLGEDU having college or university
education., MANAGER being a marketing or personnel manager of the
firm., and AGE age of the respondent., respectively.
Dummy variables PRVRENT living in privately rented housing. and
COMHSNG living in commodity housing., which indicate the absence of
rent subsidies, are included to assess the effect due to differential user cost
of housing. Dummies PVTPLAN sales of work-unit housing is being or to
be implemented. and PVTPAST privatization of work-unit housing in the
past. are included to assess the effect of housing privatization on the
motivation for employees to buy commodity housing. LRGSOE above-
average-size work units among state-owned units. captures the potentially
higher opportunity cost of private home ownership due to the more liberal
public housing benefit at larger state-owned units. PUSPV respondent in
publicly owned work units with spouse in privately owned work units.,
PVSPU respondent in privately owned work units with spouse in publicly
owned work units., and PVEMPL households employed only in privately
owned work units. are included to assess the free rider incentive.
Finally, PRICE average price per square meter of commodity housing
in each city in 1994 as listed in Table 3. is included to control for the
difference in housing market price levels among the cities in our sample.
In an alternative specification, PRICE is replaced by a set of city dummies
to control for city-level fixed effects.
VI. EMPIRICAL RESULTS
The ordered-probit model 1. is estimated with the maximum likelihood
method, where the parameters are scaled such that the error has a
standard normal distribution. We exclude from our estimation sample
those workers who had already moved into owner-occupied commodity
housing or owned work-unit housing, since their decision whether to
purchase commodity housing in the future would not be affected by the
tenure transition considerations. These cases account for 5.4% of the
whole sample; the remaining sample for estimation thus has 3749 observa-
tions. Among these renters in our estimation sample, about 12% reported
owning commodity housing although they were not living in commodity
housing; these cases are identified by an additional dummy variable,
HINV, which equals one for those owning commodity housing and zero
otherwise. Our estimation results are largely insensitive to whether the
sample includes those renters owning commodity housing. Therefore, we
report in Table 7 the estimates based on the sample of all renters.
HOUSING CHOICE AND CHINAS TRANSITION 77

TABLE 7
Sample Statistics and Ordered-Probit Estimates

Distribution among ordinal categories for dependent variable BUY

Definitely
Categories Impossible Unlikely Uncertain Possible possible
Equally 0.183 0.478 0.153 0.159 0.027
weighted
Weighted* 0.256 0.268 0.215 0.223 0.038

Sample mean and probit estimates dependent variable is BUY , number of observations is 3749 .

2 . 5 .
1 . Weighted 3 . 4 . Weighted probit
Independent Sample mean sample mean Probit estimates Probit estimates estimates
variables Std Dev. Std Dev. t value . t value . t value .

INCOME 3.431 1.726 . 3.470 1.751 . 0.0300 2.37 . 0.0344 2.80 . 0.0362 2.99 .
NRMPP 0.796 0.363 . 0.795 0.363 . y0.1516 2.92 . y0.1296 2.57 . y0.1525 3.06 .
CHNGINC 4.285 1.695 . 4.325 1.718 . 0.0347 2.90 . 0.0337 2.82 . 0.0394 3.34 .
LUXUR 0.225 0.417 . 0.234 0.423 . 0.1560 3.46 . 0.1536 3.42 . 0.1642 3.69 .
CHNGJB 2.017 0.932 . 2.027 0.956 . 0.1372 7.13 . 0.1364 7.13 . 0.1491 7.91 .
NEWHM 0.297 0.457 . 0.296 0.457 . y0.0759 1.85 . y0.0805 1.97 . y0.0801 1.97 .
CHNGSVN 3.002 0.880 . 3.026 0.887 . 0.0940 4.17 . 0.0877 3.91 . 0.0972 4.35 .
HINV 0.125 0.331 . 0.120 0.325 . y0.1193 0.57 . y0.1618 0.77 . y0.1237 0.61 .
STKINV = 0.224 0.417 . 0.233 0.423 . 0.1175 2.65 . 0.1258 2.89 . 0.1519 3.54 .
1-HINV .
JOBSEC = 1.685 1.015 . 1.715 1.027 . 0.0829 3.60 . 0.0756 3.31 . 0.0749 3.32 .
1-HINV .
STKINV = 0.043 0.203 . 0.044 0.205 . 0.0268 0.26 . 0.0369 0.37 . 0.0181 0.18 .
HINV
JOBSEC = 0.247 0.725 . 0.239 0.717 . y0.0906 1.59 . y0.0887 1.56 . y0.1078 1.95 .
HINV
EPCITY = 0.298 0.835 . 0.286 0.822 . 0.1435 2.28 . 0.1543 2.46 . 0.1600 2.64 .
HINV
EPFIRM 2.144 0.901 . 2.168 0.908 . 0.0786 3.57 . 0.0964 4.52 . 0.1110 5.25 .
EPFMLY 2.250 0.801 . 2.274 0.815 . 0.0976 3.71 . 0.1026 3.91 . 0.1181 4.52 .
FMLYSDL 1.988 0.613 . 2.003 0.622 . 0.1722 5.19 . 0.1702 5.15 . 0.1952 5.93 .
CLGEDU 0.288 0.453 . 0.301 0.459 . 0.1077 2.54 . 0.0938 2.24 . 0.1146 2.77 .
MANAGER 0.088 0.283 . 0.089 0.284 . 0.1479 2.25 . 0.1446 2.21 . 0.1673 2.59 .
AGE 37.834 9.192 . 37.499 9.215 . y0.0054 2.48 . y0.0064 3.00 . y0.0061 2.87 .
PRVRENT 0.037 0.190 . 0.041 0.197 . 0.3212 3.39 . 0.3466 3.67 . 0.3558 3.82 .
COMHSNG 0.012 0.110 . 0.015 0.122 . 0.4099 2.64 . 0.4080 2.66 . 0.3199 2.17 .
PVTPLAN 0.102 0.303 . 0.103 0.304 . 0.2176 3.26 . 0.2275 3.48 . 0.2481 3.80 .
PVTPAST 0.237 0.425 . 0.227 0.419 . y0.0100 0.21 . 0.0256 0.56 . 0.0421 0.93 .
LRGSOE 0.068 0.251 . 0.067 0.250 . y0.1936 2.66 . y0.1673 2.40 . y0.2096 3.06 .
PUSPV 0.041 0.199 . 0.043 0.202 . 0.0005 0.01 . 0.0215 0.25 . 0.0246 0.29 .
PVSPU 0.147 0.354 . 0.145 0.352 . 0.0608 1.14 . 0.0618 1.17 . 0.0753 1.44 .
PVEMPL 0.104 0.305 . 0.107 0.310 . 0.1311 2.07 . 0.1398 2.22 . 0.1620 2.58 .
PRICE 2.587 1.263 . 2.581 1.244 . City fixed effects y0.1306 7.70 .

y0.1506 8.86 .
1 y 0.9097 5.73 . 0.1640 1.10 . 0.6095 4.11 .
2 y 2.3684 14.70 . 1.6146 10.80 . 1.4237 9.57 .
3 y 2.9062 17.77 . 2.1519 14.22 . 2.0906 13.92 .
4 y 4.0608 23.84 . 3.3042 20.93 . 3.3719 21.66 .
LLR chi- 682 35 . 650 28 . 846 28 .
squared d.f..

*The weight for category Unlikely is 2r5 of the equal weights for other categories.

The estimates t value . are 0.3539 4.47 ., 0.3469 4.21 ., 0.2429 3.24 ., 0.5215 6.74 ., 0.6070 6.99 .,
0.5002 6.19 ., 0.6141 7.83 ., 0.6093 7.58 ., respectively, for city 2 through city 9.
78 FU, TSE, AND ZHOU

In addition to estimating the ordered-probit model with observations


equally weighted, we also estimated the model with category Unlikely
assigned a smaller weight so as to check the robustness of the model. The
top of Table 7 reports the distribution of the value of the dependent
variable, BUY, among the five ordinal categories. The majority of the
responses regarding the buying intention is negative, with 48% indicating
Unlikely and another 18% indicating Impossible. About 19% of
responses in the estimation sample indicate a positive buying intention,
either Possible or Definitely possible.
Column 1. in Table 7 reports the sample mean and standard deviation
of the independent variables. A typical worker in our estimation sample
had a gross monthly family income between category 3 and 4, or about
1500 yuan approximately US$180.. In terms of housing condition, a typical
workers family enjoys about 0.8 room per household member. With
respect to employment status, 6.8% workers worked in large state-owned
enterprises, 4.1% worked in a publicly owned work unit and had a spouse
working in a privately owned work unit, 14.7% worked in a privately owned
work unit and had a spouse working in a publicly owned work unit, and
10.4% worked in a privately owned unit without a spouse working in a
publicly owned work unit.
Columns 3. and 4. report the equally weighted estimates of the
ordered-probit model, with column 3. including the fixed effects of the
cities and column 4. including the average commodity housing price in
these cities. The estimates are very close in these two cases, indicating that
intercity differences with respect to workers incentive to purchase com-
modity housing can largely be captured by the differences in local housing
price levels. The following discussion focuses on the estimates in column
4..
Variables measuring the potential mismatch between housing demand
and current housing consumption are all statistically significant and show
expected effects according to our hypothesis H1.. Higher household
income level INCOME., holding housing services constant, raises housing
mismatch and hence the intention to buy commodity housing, although the
positive effect of income level can also be interpreted as the effect of
diminishing risk aversion. A recent increase in household income
CHGINC . enhances the motivation to buy commodity housing, due to
either increased housing mismatch or improved liquidity. Owning expen-
sive clothing LUXUR. contributes additional incentive to the purchase of
commodity housing. Owning expensive clothing may signal a higher perma-
nent income or a stronger preference for current consumption over saving,
and both would contribute to the demand for housing adjustment. A
greater number of rooms per person in the household NRMPP ., holding
income constant, narrows housing mismatch, hence predicting a weaker
HOUSING CHOICE AND CHINAS TRANSITION 79

motivation to buy commodity housing. Furthermore, the estimates show


that the intention to move and hence to buy commodity housing. in-
creases for those anticipating a job change CHNGJB . but is reduced if the
household has recently moved into its current home NEWHM ..
Turning to the effect of liquidity constraints and risk attitudes hypothe-
ses H2.., we find a recent increase in saving CHGSVN ., indicating higher
liquidity, to be highly positively correlated with the intention to buy. The
positive effect of liquidity is consistent with the lack of housing credits in
China. Owning stock shares STKINV . and considering job security less
important JOBSEC . show a positive correlation with the intention to buy
for those not yet owning commodity housing 1-HINV s 1., as these two
variables would correlate negatively with risk aversion. These two vari-
ables, however, appear not to be correlated with differential risk aversion
among those owning commodity housing, as the coefficients of JOBSEC =
HINV and STKINV = HIVN are not statistically different from zero.
The confidence in the city economy EPCITY = HINV . enhances the
buying intention for those owning commodity housing. Intuitively, those
more confident about the city economy would also be more optimistic
about the future value of their existing housing investment and thus would
be more favorable to making further investment. The confidence in the
city economy EPCITY . appears to have no effect on the buying intention
for those not owning commodity housing, once the economic confidence
for the work unit and family are controlled; thus variable EPCITY = 1-
HINV . is dropped from the final estimation. The effect of EPFIRM is
highly positive, as is the confidence in current and future family economic
well-being FMLYSDL and EPFMLY .. With labor mobility still lacking
for urban workers in China, family fortune cannot be separated from the
profitability of the work units. Confidence in the economic conditions of
ones family makes one more tolerant of investment risks or signals higher
permanent income; both enhance the motivation to buy commodity hous-
ing.11
We find that higher education CLGEDU . and being a senior manager
in a work unit MANAGER. strengthen the intention to buy commodity
housing. Several interpretations for this are possible. Higher education or
a management position may enhance the preference for housing consump-
tion or signal a higher permanent income. Alternatively, they may reflect
greater human and social capital, which could lower the transaction cost
related to the transition to private home ownership; buying and owning

11
While permanent income may have an ambiguous effect on housing tenure choice, it
positively affects the demand for housing adjustment. Given the lack of housing choices in
the private rental market in Chinese cities, demand for housing adjustment motivates the
decision to buy commodity housing.
80 FU, TSE, AND ZHOU

commodity housing would demand greater decision-making effort com-


pared to renting public housing. The negative effect of AGE could reflect
a higher transaction cost of the tenure transition faced by elder workers,
who may find it difficult, or even unfair, to have to adapt to private home
ownership. The effect of AGE also appears to be consistent with the
existing evidence that residential mobility tends to decline with the age of
the household head DiPasquale and Wheaton w7x..
The variables capturing the potential differences in the opportunity cost
of tenure transition show their effects in accordance with our hypotheses
in H3.. First, households who would pay market cost for housing services
PRVRENT and COMHSNG. are more ready to buy commodity housing.
Second, workers in work units with a plan to privatize public housing
PVTPLAN . show a stronger intention to buy; housing privatization in the
past PVTPAST ., however, does not have much effect.12 This finding
supports the notion that privatization of the existing public housing stock
would separate welfare transfer from individual housing choices. Third, the
negative coefficient for LRGSOE indicates that workers in large state-
owned units have a weaker incentive to buy commodity housing, consistent
with more liberal public housing benefits provided by larger state enter-
prises. Fourth, the free-rider incentive is demonstrated by the insignificant
coefficients for PUSPV and PVSPU, in contrast to the positive effect of
PVEMPL; tenure choice incentive depends on the best public housing
benefit accessible in the family. Finally, the effect of PRICE is negative
and highly significant, indicating that individuals intention to buy com-
modity housing is sensitive to its price.
The goodness of fit of our ordered-probit model can be evaluated in
several ways. First, the ordered intercepts are distinctly different and well
behaved, indicating that the ranking of buying intention is highly consis-
tent among the workers surveyed. Second, we can examine the correlation
between observed and predicted outcomes, as reported in Table 8. The
overall rate of correct prediction for the whole sample, with equally
weighted observations, is 49%. A closer look at part A, however, reveals
that the predicted outcomes concentrate in one category, Unlikely,
which has the highest proportion of observed outcomes. To check whether
the estimates of the model are robust if the dominant influence of
category Unlikely is reduced, we reestimate the ordered-probit model
with weighted observations. We assign equal weight to all observations
except for those belonging to category Unlikely, which has a 2r5 weight
relative to other categories. As a result, the weighted proportions for
observed outcomes of BUY are more evenly distributed among different

12
Since the workers in the estimation sample did not report owning their work unit
housing, they appear not to have benefited from past housing privatization efforts.
HOUSING CHOICE AND CHINAS TRANSITION 81

TABLE 8
Observed and Predicted Outcomes

Percentage
Predicted Definitely Total correctly
Observed Impossible unlikely Uncertain Possible possible number predicted

A. Probit estimation equally weighted observations.


Impossible 44 635 0 6 0 685 6.4%
Unlikely 35 1706 0 50 0 1791 95.3%
Uncertain 5 532 0 38 0 575 0.0%
Possible 0 512 0 85 0 597 14.2%
Definitely possible 0 76 0 25 0 101 0.0%
Total number 84 3461 0 204 0 3749 48.9%
% of grand total. 2.2%. 92.3%. 0.0%. 5.4%. 0.0%.
B. Weighted probit estimation
Impossible 375 222 0 88 0 685 54.7%
Unlikely 644 724 0 423 0 1791 40.4%
Uncertain 131 242 0 202 0 575 0.0%
Possible 67 201 0 329 0 597 55.1%
Definitely possible 11 28 0 62 0 101 0.0%
Total number 1228 1417 0 1104 0 3749 38.1%
% of grand total. 32.8%. 37.8%. 0.0%. 29.4%. 0.0%.

ordinal categories, as shown at the top of Table 7. Part B of Table 8 shows


that the predicted proportions for the various outcomes become much
closer to the weighted proportions for the observed outcomes. Although
the overall rate of correct prediction is smaller, the correct rate is more
even for different categories. The results of the weighted probit estimation
are reported in column 5. and are very close to those reported in column
4.. All the empirical results based on the equally weighted probit estima-
tion hold, and, in many cases, the effect of the independent variables
appears to be more significant statistically.
In summary, our empirical results show that the variables indicating
housing mismatch, liquidity constraints, risk attitudes, and access to public
housing benefits all have expected impact on individuals motivation to buy
commodity housing. To assess the potential impact of reform policies on
the demand for commodity housing, we calculate the predicted incremen-
tal probability of a positive buying intention i.e., Possible and Defi-
nitely possible. due to policy variations. We assess the following policies:
i. removal of rental subsidy effect of PRVENT ., ii. privatization of work
unit housing effect of PVTPLAN ., iii. removal of excess housing benefit
in large state-owned enterprises effect of LRGSOE., iv. removal of
housing benefits in publicly owned work units effect of PVEMPL.. In
addition, we compare the incremental effect of these policy variables with
82 FU, TSE, AND ZHOU

that of a reduction in housing price by 1000 yuan per square meter., or


38.7% off the mean price level.
The results are presented in Table 9. The base case for evaluation is the
case where all independent variables are set to their sample mean, except
that i. PRVENT s COMHSNG s PVTPLAN s PVTPAST s LRGSOE
s PVEMPL s 0 and ii. PUSPV s PVSPU s 1r2. In other words, this
benchmark worker rents public housing, his work unit has no plan to
privatize the work unit housing, and, with equal probability, he either
works in a publicly owned unit with a spouse working in a privately owned
unit or works in a privately owned unit with a spouse working in a publicly
owned unit. This benchmark worker has somewhat more access to public
housing benefits than does a typical worker in the sample. The predicted
probability of a positive buying intention for this benchmark case is 15.7%,
slightly lower than the observed proportion for categories Possible and
Definitely possible. In each of the alternative cases, we allow one policy
variable to take a different value from the base case. As the last column of
Table 9 shows, i. removal of public rental subsidy would raise the demand
for commodity housing by 62%; ii. privatization of public housing would
increase the demand for commodity housing by 39%; iii. removal of
excess housing benefits in large state-owned enterprises and removal of
housing benefits in publicly owned work units would each increase the
demand for commodity by about 23%. In comparison, reducing the hous-

TABLE 9
The Impact of Institutional Factors on the Incentive to Buy Commodity Housing
Based on Equally Weighted Probit Estimation.

Percentage
Predicted probability of Incremental difference in
indicating Possible or probability over probability over
Definitely possible the base case the base case

Base case* 0.1570


Variation from the base case
PRVRENT s 1 0.2545 0.0975 62.1%
PVTPLAN s 1 0.2179 0.0609 38.8%
LRGSOE s 1 0.1202 y0.0368 y23.5%
PVEMPL s 1 0.1929 0.0359 22.9%
PRICE s mean y 1 0.1904 0.0334 21.3%

*Base case: all independent variables are set to their sample mean except i. PRVENT s
COMHSNG s PVTPLAN s PVTPAST s LRGSOE s PVEMPL s 0 and ii. PUSPV s
PVSPU s 1r2.

The predicted probability equals 3 y y X ., where is the cumulative distri-
bution of standard normal, X is the vector of independent variables, and 3 y and are
estimated parameters as reported in column 4. of Table 7.
HOUSING CHOICE AND CHINAS TRANSITION 83

ing price by 1000 yuan per square meter about 38% off the mean price
level. would increase the demand for commodity housing by only 21%.
Clearly, housing welfare policies, especially the policy of public rental
subsidy, have substantial impact on the individual demand for commodity
housing.
VII. CONCLUSION
Transition to a housing market is one of the most important reforms in
China, with deep economic and social consequences. A difficult task in this
transition is to wean urban residents away from publicly subsidized hous-
ing to become private home owners. We have shown that Chinese urban
workers intention to purchase commodity housing is sensitive to various
incentives, including housing mismatch, liquidity constraints, risk attitudes,
economic confidence, the cost of commodity housing, and housing welfare
policies. In particular, the individuals who are likely to participate in the
housing market are those who have a relatively high income and live in a
crowded home, are mobile in the job market and invest in stocks, are
economically confident and young, and have no access to publicly subsi-
dized housing. An important result emerging from our empirical analysis
regards the role of continued access to publicly subsidized housing in the
transition to a housing market. Our result indicates that the access to
publicly subsidized housing has a stronger negative impact than the afford-
ability of commodity housing in motivating individuals to participate in the
housing market.
The results in this study suggest that there are three major ways to
facilitate the development of Chinas housing market. First, the housing
market and the other related markets need to be efficient. Producers need
to improve the local public infrastructure and lower the cost of commodity
housing so as to stimulate demand. The housing prices need to respond to
the market mechanism so as to clear the inventories. It would be helpful to
establish consumer housing mortgage systems to provide more financial
resources to the housing market. Moreover, job market efficiency and the
social security system must be enhanced to improve the economic confi-
dence of urban workers.
Second, our study suggests that selected groups of urban workers will
have a greater inclination to move into the housing market. Those who
have a higher income, are younger, and live in areas where prices are not
as high showed a higher probability to buy private housing. Accordingly,
these groups may be the prime agents who facilitate the housing market.
Third, decision makers need to consider reversing the age-old subsidized
housing policy. Indeed, the removal of publicly subsidized housing is
inevitable for China to successfully establish a housing market. The
Chinese central governments commitment to ending subsidized housing
84 FU, TSE, AND ZHOU

for urban employees by the end of 1999 is a correct move. This decision
reflects how urgent removing subsidized housing is to Chinas housing
reform. Simultaneously, it shows how determined the government is to
tackle it.

APPENDIX I: SURVEY METHOD

Sampling
A total of 3964 respondents from 180 firms in nine cities participated in
the survey. They were recruited through a multistage sampling procedure.
The sampling frame of the first stage consisted of all Chinese mainland
cities of provincial capital or provincial status. They were grouped into
three tiers based on their per capita income in 1996. Three cities were
selected from each tier; they were Beijing, Shanghai, and Guangzhou high
income.; Nanjing, Wuhan, and Chengdu medium income.; and Changchun,
Guiyang, Xian low income..
In the second stage, the manufacturing firms with 100 or more employ-
ees in each of the nine cities were classified into four types by ownership
structure state-owned, collective-owned, joint-stock, and Chinese-foreign
joint ventureaccording to the 1996 national industrial statistical data
bank supplied by the Chinese Statistical Bureau. Twenty firms were
randomly selected from each type. Only the manufacturing sector was
covered, because in other sectors fewer types of ownership existed. After
eliminating the firms that declined the survey, went out of business,
located too far away from the city center to be reached by our field
interviewers, or did not have enough middle-level managers as required
by our sample criteria ., 78.3% of the randomly selected firms were
included in the final sample. The remaining number of firms in the final
sample were selected by the field interviewing firm, with the balance in
enterprise types, industrial sectors, and location distribution taken into
account.
In the final stage, 22 employees were selected from the employee list
supplied by the personnel department of each firm, excluding the employ-
ees from such side-line departments as firm-run kindergartens or hotels
that had little to do with the firms main line of business. Among the 22
interviewees, one was a personnel manager, one a marketing manager, 10
were randomly selected middle-level managers, and 10 were randomly
selected nonmanagerial employees. There were four extra employees, from
different firms, interviewed in Shanghai.

Data Collection
The data were collected in a 6-week time period from November 17 to
December 26, 1997.
HOUSING CHOICE AND CHINAS TRANSITION 85

Firm-Le el Data
Firm-level data were first obtained from a questionnaire completed by
the personnel manager. They were then verified according to the data
available from the previously mentioned national industrial statistical data
bank. In the few cases where discrepancies were found, we use the data
from the data bank because it had been officially audited.

Indi idual-Le el Data


Individual data were collected through face-to-face interviews. A major
market research company in Beijing with branches in all nine cities studied
was commissioned to carry out the interviews.

APPENDIX II: DEFINITION OF VARIABLES

BUY the intention to buy commodity housing in the next 3 years.:


0 s impossible, 1 s unlikely, 2 s uncertain, 3 s possible, 4 s definitely
possible
INCOME family gross monthly income level, yuan.; categories 1 to 9:
less than 600, 6011000, 10011500, 15012000, 20012500, 25013000,
30014000, 40015000, over 5000
NRMPP number of rooms, excluding bath, kitchen, storage, and
patio, per person.
CHNGINC current family income relative to that a year before.;
categories 0 to 9: over 50% less, 3149% less, . . . , 50100% more, over
100% more
LUXUR owns expensive clothing in the household.: 1 s owning,
0 s otherwise orw.
CHNGJB prospect of changing work unit.; categories 1 to 5: very
unlikely, . . . , very likely
NEWHM newly moved into current home.: 1 s newly moved in,
0 s orw
CHNGSVN current saving relative to that a year before.; categories 1
to 5: substantially reduced, reduced, unchanged, increased, substantially
increased
HINV owning commodity housing.: 1 s yes, 0 s orw
STKINV owns common stocks.: 1 s owns; 0 s orw
JOBSEC importance of job security when looking for a new job.;
categories 1 to 5: very important, . . . , very unimportant
EPCITY expectation of economic conditions in the city in a year.;
categories 1 to 5: very negative, . . . , very positive
86 FU, TSE, AND ZHOU

EPFIRM expectation of profitability of the firm in a year.; categories


1 to 5: very negative, . . . , very positive
EPFMLY expectation of economic conditions in the family in a year.;
categories 1 to 5: very negative, . . . , very positive
FMLYSDL perceived standard of living of the family compared with
the average in social circle.; categories 1 to 5: much worse, . . . , much
better
CLGEDU having college or university education.: 1 s yes, 0 s orw
MANAGER being a marketing or personnel manager of the firm.:
1 s yes, 0 s orw
AGE age of the respondent.
PRVRENT living in privately rented housing.: 1 s yes, 0 s orw
COMHSNG living in commodity housing.: 1 s yes, 0 s orw
PVTPLAN privatization of work-unit housing is being or to be
implemented.: 1 s yes, 0 s orw
PVTPAST privatization of work-unit housing in the past.: 1 s yes,
0 s orw
LRGSOE above-average-size work units among state-owned units.:
1 s the work unit is state-owned, with number of employees exceeding
1000; 0 s orw
PUSPV respondent in publicly owned work units with spouse in
privately owned work units.: 1 s yes, 0 s orw
PVSPU respondent in privately owned work units with spouse in
publicly owned work units.: 1 s yes, 0 s orw
PVEMPL households employed only in privately owned work units.:
1 s yes, 0 s orw
PRICE average price, 1000 yuan, per square meter of commodity
housing in the city, 1994.

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