2 Literature Review
2.1 An over view of Current real estate marker in China
China's real estate industry has made great breakthrough from last three decades since Xiaoping Deng announced the "open policy" from 1978. Nowadays, the progress of real estate market in China is considered as the major engine of China's economic improvement (Fung et al., 2006; Hinton and Tao, 2006). There are a series of government policies have been established to stimulate this revolution, including abolition of the administrative housing allocation system which has been used for almost half of century since 1949 when new China is established, moreover, the government start to reform the finance environment, land supply and taxation systems, all of which have created a beneficial operating environment for new real estate development in China (Choi, 1998). Besides, the successful bid to host the 2008 Olympic Games in Beijing, and entry into the World Trade Organization (WTO) in 2001 have quicken a great deal of steady improvement of legal and regulatory systems, enhancing the real estate investment environment (Fung et al., 2006). These advances in development in Chinese property market contribute a huge of fruitful opportunity to investors who want to make profit in investing in real estate market, not only for local developer and investor, but for foreign property developer and investors. Therefore, the competition between both sides of investors will improve and boost a new round of evolution in Chinese real estate market.
With the booming market of recent years, real estate prices have constantly overgrow inflation (Fung et al.,2006). For example, housing prices steadily increased by 68% in China between 2001 and 2004 (Woods and Smith, 2005). In 2007, the sale price of houses increased by 10.5% in main cities compared to 2006 (Xie, 2008). The phenomenon of rapidly increase in house price has gained wide attention. At the end of 2007, Chinese real estate market started to keep the house price stabilization by direct government intervention, which concerned the affordability for ordinary people and macroeconomic consequence (Peng et al., 2008). According to Zhang and Fung (2006), housing prices in China are equivalent to those of high-income nations, which the house price should be proportionate to per capital income of urban people, which is still low by international standard in China. It is undeniable that Chinese is rapidly growth during last ten years, but China remains a developing country. the overheated property market reflecting abnormal phenomenon nowadays in China, people rather keeping purchasing property than saving and other kinds of investment, which result in people who really need a house but cannot afford it, because the house price is higher than income of most people in China. For guiding a healthier development, government adopted a series of policy to restrict fast increase in investing in real estate market (Hou, 2009), moreover the Chinese authorities have implemented macroeconomic regulatory policies to adjust housing supply structure, undertake to solve lower income resident housing and lower property sale prices (Li et al., 2009). In 2005, Premier Wen Jiabao definitely stated that the healthy development of real estate was one of the seven key tasks of the Chinese central government. A tax on homes sold within two years, increased the interest rate and limited property investment borrowings were used for cooling overheat Chinese real estate market(Zhang and Fung, 2006). In 2007, the number of real estate enterprises in China decreased by
39.8% compared to 2006 (Xie, 2008), According to date from the National Bureau of Statistics of China (NBSC), after one year relative stabilization in Chinese housing price, there is a fast recovery from fall in early 2008, housing sales and property prices in China rose in the first half of 2009 until now. In 2009, the total investment in real estate development amounted to 3,623.2 billion Yuan, up by 16.1 percent year-on-year. Of which, investment in commercial residential buildings reached 2,561.9 billion Yuan, 14.2 percent of increase year-on-year, occupied 70.7 percent of the investment in real estate development (NBSC, 2009). From these data of recent house market in China has been reflected the irrational consumption of Chinese residents, house prices begin a new round of growth.
2.2 The determinants of house prices
Housing price is affected by many kinds of factors. Generally can be divided into two aspects-he economic and the socio-demographic, in the view of econometrics, assuming consumers are economically rational, then they will consider buying a house as a kind of maximize utilities under a given budget constraint, For example, income, assets, and prices are the most important factors affecting housing behavior (Henderson and Ioannides, 1989; Plaut, 1987). However from the view of socio-demographic, house is a shelter which is one of the necessities of life, marriages, death and divorce all have an impact on house demand.( Ratcliff, 1972). For instance, there is a new family has been created when people get married, which is an important factors in increasing demand for dwelling. Furthermore, changes in economic circumstance, such as price inflation and increasing mortgage rates, can also affect residents' tenure choice (Clark et al, 1994; Deurloo et al, 1994; Rudel, 1987).
According to Case and shiller (1990) paper, they find that housing prices are emphatically correlated with the diversification of construction costs, growth of population and income. But Poterba's (1991) investigation prove that real income and construction cost do give a good explanation on housing prices change, he also find that population growth doesn't have explanatory power in housing prices changes sometimes when he test 39 cities from 1980 to 1990, however, from Clapp and Giccotto (1994) literature, they find even though population growth cannot explain housing prices changes, it still can forecast the trend of variations of housing price. Potepan (1996) test more variable factor which probably influence housing price such as rent, land prices, household income, crime rate, air population and a series of factor which most of them are social environmental variables, in that paper he find household income and construction costs are the most important elements effecting housing prices.
There is also a large theoretical literature showing that in the house market, demand and supply factors could be dividing into a longer-term influence and shorter-term influence. In the long run, factors that affect the demand for housing include increased household disposable income, age and family status, average level of interest rates which possibly related to behavior of inflation in the long-run. For housing supply, land cost and availability of land, improvement and investments in the existing housing stock are longer-term determinant of supply. Similar evidence has been proved this theory, Quigley (1999) uses data of 41 cities from 1986 to 1994 to find out which factors could explain the housing price variation in short run and long run, in his paper, he finds that some factors include unemployment rates, new building supply and construction cost cannot fully explain the housing variation in the short run, but in the long term, these factors could be explained very well.
