Abstract
This paper will investigate the dynamic effects of fundamental factors on china house price. Also try to examine how housing prices react to adjustment when these factors change in short term. At the beginning of 2009, in response to the global crisis, Chinese government adopted a series of new land policiesâ‘ , I want to test whether these feedbacks change after new land policies were issued. I find that the main fundamental factors which influence housing price variations still are household income, new-build supply, housing units sold, expectation price and land prices. However, interest rate which usually be considered as no explanatory power in explaining Chinese housing price variations, starting to play an important role that influences the housing demand and price in China. Among these factors, the most essential one still land prices, but the effect of house expectation prices is especially enhanced after new land policy issued in 2009.
1 Introduction
House price as well as other asset prices, house price usually equal the discounted stream of future housing [1] return, for instance, in the long run. Moreover, discount factors and rent price are affected by macroeconomic shock, on the contrary, the shock in diversity aspects also affect housing price in the end. However housing has many characteristics which make it different from other asset, for example, for the house owner, housing is not only an asset but also a consumer durable which takes most part of household, own a house means have a place to live and be protected by shelter. Therefore, due to special features of housing have, like immobile and value-preserved, it is usually used as collateral for loan, so that a huge of part of financial sector assets is tied to housing value (Goodhart, 2007). As a result, house price may enlarge the effects of macroeconomic shocks, such as supply, demand, or monetary policy, and bubbles, moreover, house prices may undermine the stability of the entire economy system.
Real estate market in China is consider as a "new" market, neither transparent nor mature nowadays, it has an invisible connection with government policies and law, which have influence on supply and demand of whole property market in China. In many Chinese cities (such as Beijing, Shanghai, Hangzhou, etc.) house prices have been soared in the past few years, which has aroused wide concern. The focus of attention is nothing less than affordability of ordinary people and implied real estate market bubble. With house prices is soaring day by day, the majority of ordinary citizens are increasingly feeling that they can hardly afford the rising house prices, personal income growth rate is far less than the highly rise in housing market over the same period. These phenomenon make the government increasingly worried about, bubble of housing market will be burst in the future.
In theory, the market equilibrium prices are determined by supply and demand, and household income symbolize affordability, which is acknowledged as an important factor for housing market demand, even though there is an increase in household income of Chinese people, comparing to highly burst in housing price in China, it seems that increased income is not able to enlarge house demand. As I mentioned above, because real estate market in china neither transparent and nor mature, so there are a lot of unexpected factors would affect housing price in short term in China. In this paper, I will try to analysis reasons why housing price in China is extraordinary high from varied aspects, and attempt to find out solutions.
A number of studies, such as Case and Shiller (1990), Poterba's (1991) prove that housing prices are affected by varies factors which include construction cost, people's income and population growth. Potepan (1996) further test many else factors include rent, land prices and many different variables which give us many good explanation on how do these variables have an affection on house prices all around the world. Although Chinese house market as a "new" market, some of these factors have the same explanatory power on housing prices such as disposable income, population growth, construction costs, property taxes, mortgage interest rates, land prices, vacancy, unemployment rates, however, house market in China still have its own characteristic. Recent study by Deng (2009), who use panel VAR models to test over 40 cities' housing price (from 2000 to 2005) in China after government adopted a new competitive method to grant land rights in 2002. In that paper, they find an interesting phenomenon that land price is a key factor on housing prices, but interest rates have no impact on housing prices in China.
Recent years, many new policies had been adopted by government of China which aim to control overheated housing price, as maturate as Chinese housing market, housing market has been started to develop healthily. How does the newly adopted policy influence housing prices after 2005?
In this paper, I use a sample of provincial level data during 2005 to 2008 to answer the above question. My evidence shows that housing prices are significantly affected by household disposable income, land prices, construction costs, new-build supply, housing units sold per year, rent, unemployment rate, but population growth still cannot explain the variation of housing prices in China. More importantly, interest rates start to affect housing price due to new adopted land policies, which also have influence on the impact of these factors to housing prices.
In my paper, I use same panel VAR models as most econometrics adopted in their literatures, try to investigating the dynamic variation of housing prices. I attempt to test how the adoption of the new land policy affects this dynamic relation. Moreover, I also plan to analyze those factors which cannot be explained by economics data but remain playing an important role in housing demand in Chinese house market from aspects of socio-demographic and unique culture of China.
