Non-speculative housing policy's spillover effect on the stock market: Real estate-incorporated dynamic equilibrium model and asset pricing study

The principle that "houses are for living in and not for speculative investment" sets the critical tone for China's long-term real estate market regulations. Bound to the financial system, real estate market regulations would spill over to the stock market due to the close association between financial crisis and real estate fluctuations. This paper distinguishes real estate from traditional capital and constructs a general equilibrium asset pricing model with households and firms. Taking the "non-speculative housing policy" as an exogenous shock to households' housing preferences, we analyze the mechanism and study the policy's impact on firms' stock returns. Our simulation results find negative responses of land price growth and stock returns to the housing policy. Using the short-term event analysis and difference-in-differences methods, we empirically find a negative effect of the policy on firms' short- and long-run stock returns. Specifically, with a one percentage point increase in firms' real estate ratio, the daily return decreases by 1.04%, and the annual return reduces by 13%. Policy suggestions are put forward on the spillover effect and the risk exposure.