A Study On China's Real Estate Cycle Fluctuation And Reasons

Since the1980s, the global real estate market has been a spate of large fluctuations of theexpansion and contraction. China's real estate market started in1987and finished themarket-oriented distribution in1998. In a short period of twenty years house prices expandedrapidly in the fluctuations. Especially after2003, most urban housing prices continued to rise,triggering a huge debate on the real estate bubble. During the2008financial crisis, pricesexperienced short-term volatility fluctuation,in hand with a series of regulatory policies on realestate prices in China. From the historical experience of some developed countries, the volatility ofhouse prices brought about a huge threat to macroeconomic stability and even leaded to a prolongedrecession. This put higher demands on market regulation and supervision. China's experience inmarket regulation shows that the effect of mere use of monetary policy on the market is not obvious.The government had to take direct administrative interventions. The rationality of these measureshas been the vexed issue of the theoretical circle.Focusing on China's real Prices estate cycle, the thesis analyzes the theoretical and empiricalintrinsic links between these phenomena.The thesis measured and interpretated the real estate price cycles, compared with foreign realestate cycle, analyzed the relationship between real estate cycle, macroeconomic, stock marketcycles and inflation cycle, made specific characterization of the characteristics of fluctuations in thereal estate price cycles, summarized typical facts on the characteristics of price cycles fluctuations.The results show that China's housing prices have high frequency of cyclical fluctuations. Pricesrises rigidly, the mid-cycle does not exist., There are leading and lag relationships between the Pricecycles, consumer price cycles and the stock price cycles. There is a significant correlation betweenthe positioning of the real estate in the macroeconomic policy and prices.The paper analyzes the causes of growth and volatility of China's housing prices cycle. Realestate prices continue to rise by institutional innovation, economic growth, industrialization andurbanization, excess liquidity factors. The paper established a general equilibrium-cycle model withconsumption habit formation and capital adjustment costs, explained that the price fluctuations arecaused by the mechanism of micro-investment and consumer behavior. Higher real estateconsumption habit formation makes the representative family transforms smaller fluctuations of themarginal utility of real estate into larger price fluctuations. Due to the presence of adjustment costs,investment fluctuations lead to price fluctuations. When the total output changes, the representationfamily tends to change it into the variation in investment rather than current consumption changes.Interest rates, credit growth, money supply have an important influence on the fluctuations inthe price cycle. They also lead to cyclical fluctuations of the real estate industry in recent years. On the basis of theoretical analysis, the paper established a varying parameter model to analyze theinteraction between interest rates the credit, investment and money supply and real estate pricecycles in the different stages. From the empirical results, the impact of changes in interest rates onhouse prices is very small. This isn't consistent with the theoretical analysis. The interest rateadjustment mechanism in prices cycle fluctuations failure. There is a stable consistency betweenbank credit and price cycles. The impact of bank credit to the price cycle is less than the moneysupply. Elasticity of money supply is the highest in1998and reached the lowest value in2005.After2005the money supply played enhanced role in promoting the growth in house prices. Moneysupply's impact on prices is greater than the impact on investment funds by way outside of the realestate investment.Therefore, we believe that our long-term real interest rates are low and this brought strongupward momentum to house prices. Under low interest rates, the bank's real estate allocation ofcredit resources lacks of capital cost constraints. The dynamic adjustment mechanism between thereal estate industry and other industries lack bank credit as an intermediary. The small changes ofinterest rates at a low level make too small changes to investor decisions to make a substantial turnin the market so that fluctuations mechanism in the price cycle can not be achieved. This is why thereal estate regulation adopted direct administrative control measures. If the interest rate under thelong-term control can not reach the equilibrium interest rate where the money supply and demandare equal, the price fluctuations will lose stable base. Price fluctuations after2005is, the results ofthe liquidity shock in the interest rate failure conditions. Currency by resident investments, hotmoney and bank credit channels put impact on the real estate market led to a substantial increasein short-term fluctuations.High prices under the lack of interest rate elasticity have two important consequences. First,this led to the welfare of those without housing relatively declined. Due to the price continued torise rapidly with lack of interest rate elasticity, the behavior of buyers lacked the cost constraints,the initial allocation of housing wealth and income-determined housing affordability are the mainconstraints of the housing investment decisions. Rising house prices cycle resulted in the therelative welfare gap between housing and no housing continued to widen. The bank risk isaccumulated. Weakening of the investment cost constraints, the credit risk of banks is difficult toaccurately assess. Once the real interest rates rise, the cost of capital constraints of borrowersstrengthened, the potential risks of the bank exposure and may pose a threat to financial stability.The paper reviewed and evaluated the course of the real estate market regulation. With the lack offlexibility of real estate price changes, the market is in serious lack of stability and vulnerable to theimpact of the potential supply of money under certain conditions. In this context, the response of the real estate market for short-term government intervention is often excessive, The price either rosetoo fast or falled back too excessively. Stable expectation is the main real estate control policyoptions at this stage. With regard to fluctuations in the real estate cycle, the policy should mainlycontrol the financial risks due to bank credit.Finally, the paper put forward the main conclusions and policy recommendations. In the longrun, building a real estate market with a reasonable pricing mechanism is the inevitable choice ofChina's real estate development. Institution building is a long-term and stable basis for thedevelopment. We should push forward the development of financial system reform and interest ratemarkets, improve the real estate market, increase the financial supply, stabilize long-terminvestment, and promote property tax reform as the main institution construction measures.