The first part of the paper is the research review and phenomenon description, it introduces the research background and research questions, describes the development process, allocation practice, and practical dilemma of policy-based housing. Under the market economy in China, the allocation of residential land for policy-based housing is a crucial guarantee for middleand low-income residents to live in the city. A large number of policy-based housing allocations began in 2007. Under the premise of the nationalization of land ownership, the government provides tax incentives, financial support, land supply priority, land price restriction, and other policies to guide market participants in policy-based housing allocation. Essentially, the policy-based housing allocation is a way of using planning methods to achieve “planning gain”. The administrative departments grant planning permission, and the market provides funds for construction to make up for the negative externalities caused by the development of commercial housing to urban transportation, municipal facilities, and other aspects, and to restore the public interests. The second part of the paper is the characteristics identification and mechanism analysis, clarifying the capital logic of the market allocation model of policy-based housing, and analyzing the influence mechanism of the allocation subject. Although the policy-based housing allocation realizes the housing mix of different social classes, avoids the problems of residential differentiation and social isolation, it also can cause social contradictions due to the differentiated supply of public services. The paper holds that the current market allocation model is a kind of capital logic of “commercial housing for policy-based housing” with the task-based supply thinking. From the role analysis, it regards the local government as the “operator” who supplies the urban residential land, and also the “person liable” who supervises the policy-based housing. The real estate developer pays the land transfer fee, is the “investor” who uses the residential land, and is also the “implementer” who constructs the policy-based housing. Both policy-based housing owners and commercial housing owners are passively accepting marginalized roles. The third part of the paper is strategy response and research expansion. To coordinate and arrange the long-term development of low and middle-income residents and sustainable urban development, it puts forward the strategies of innovating the market allocation model and appropriately extends the role of local government and market subject. It emphasizes that the role participation of “residents” should be strengthened in the allocation process. Aiming at the sustainable development of “growth coalition”, local governments should