Housing affordability and housing vacancy in China: The role of income inequality

China's urban housing price has dramatically increased in the past decade, surpassing income growth and raising fears of a real estate bubble. The increase in housing price is also accompanied by a growing number of vacant apartments. This paper argues that income inequality is one important factor driving up both the housing price relative to income and the housing vacancy rate. Using data from China's Urban Household Survey, the paper empirically examines the effects of income inequality on the housing price-to-income ratio and housing vacancy rate within each city. We find that the income GINI coefficient is positively related to the housing price-to-income ratio as well as the housing vacancy rate. In particular, a one percentage higher GINI coefficient is associated with increases in the housing price-to-income ratio and housing vacancy rate of 0.026 points and 0.166 percentage points, respectively. During 2002 and 2009, approximately 6% of the increase in the housing price-to-income ratio and 10% of the increase in the housing vacancy rate can be attributed to the increase of the GINI coefficient. Further studies show that the development of the capital market and housing rental market are somewhat helpful in mitigating the associations between income inequality and the housing price-to-income ratio and vacancy rate.