Assessing the Effects of Tax Incentives on Size Distribution and Prices in Shanghai's New Housing Market

This paper aims to provide empirical evidence on a policy that reduced tax rates for properties less than or equal to 140 square meters (sqm) to promote middle-income housing in China. It uses novel data to examine the effects of tax incentives on the new housing market in Shanghai between 2004 and 2007. The study finds that the combination of a 1.5% decrease in the deed tax, a 5.5% decrease in the sales tax, and a maximum of 5% decrease in the land value added tax for properties below 140 sqm increased the supply of new properties in the (100, 140] sqm range by 33.6% compared to those in the [140, 180) sqm range. Moreover, the study reveals that tax incentives led to a 6.5% decrease in the average price of properties below 140 sqm compared to those above. Evidence suggests that this price decline is the result of an increased supply of smaller properties at lower prices. Overall, the findings demonstrate that the policy effectively encouraged the supply of mid-sized properties at more affordable prices.