Study On Wealth Effect Of Real Estate Market In China

The study on wealth effect in western country has existed for many years. The concept ofwealth effect had pointed out by Haberler, Pigou and Patinkin firstly, which means that in the samecondition, real money balance effect will lead to the change of total consumer spending. Thewealth effect of assets price could usually be divided into two kinds: The wealth effect of stockmarket (which represents the wealth effect of financial asset market) and the one of real estatemarket (which represents the wealth effect of non-financial asset market). However, the wealtheffect of real estate market has not been paid enough attention until the end of 1990s. At that time,the sharp decline in share market affected the global economy seriously. However, the expectingconsumption expenditure did not reduce at the same time. It was the most suitable explanation inthe academic field that the negative wealth effect of decreasing of stock market on consumptionwas offset by the positive wealth effect of real estate market in some degree. In the other hand, thecapital-intensive feature of real estate market and the low interest rate these years have led toexcessive speculation demand, which has brought the co-moving of household consumption andeconomic rising. Therefore, the study on wealth effect of real estate market has been paid muchmore attention than before.As the housing reform in China, the house price and the investment in real estate growextraordinarily, and the real estate industry has become one of the main pillar industries of thenational economy. Even to this day, the asset price fluctuation for representatives to house pricehas great influence on household consumption and national economic growth."How to take theFinancial Crisis as a warning, draft relative policy to regulate and control the real estate market andexpand domestic demand to pull Chinese economic development in order to avoid financialsecurity raised by house prices fluctuations?"becomes a very important issue for the governmentand scholars.This dissertation is based on relative theories and literatures of the consumption function andwealth effect, combining the specific background in Chinese real estate, to analyze transmission mechanism and the size of wealth effect in real estate market in China deeply and roundly.Firstly, this dissertation analyzes the market situation and variation trend since Chinese realestate reform, reviews the theory of the Consumption Function overall, clarifies the transmissionmechanism of wealth effect in real estate and concludes several important elements which willinfluence wealth effect in real estate market.Secondly, compared with the western country, Chinese real estate market still in the primarysituation and the house price is irrational high, so the real estate market shows up irrationalprosperous which leaves from fundamentals determined by rent and appears some special pheno-menon which western countries rarely exist. The phenomenon will definitely affect the wealth eff-ect value of real estate market and also block the transmission channel of wealth effect in some degree. This dissertation implements Permanent Instantaneous Model and Information Sharing Modelwhich is originally used in spot-future market into the real estate market. It is believed that there isa potential house price existing behind the housing selling price, land price and rental price, and thecontribution rate in every market to potential house price is examined correspondingly. Theconclusions show that the house price has been increasing rapidly in the past decades, but the rentalprice increases quite slowly and has nearly zero contribution rates to potential house price.Meanwhile, the rental price is independent from housing sale price and land price, and does notplay a proper role to both the house price and the wealth effect in the real estate. Besides, in theprocess of examining the influencing factors on house price, it is found that the house price hasinfluenced on GDP within short time instead of in the long-run. There is excessive speculativedemand in Chinese real estate market which represents irrational flourishing, and the transmissionmechanism of wealth effect via rental market is not smooth.Thirdly, the changing of external economic environment will affect the wealth effectundoubtedly, so the wealth effect of real estate will show different characteristics in different time.Based on the time series data and panel data this dissertation sections the sample interval after thereal estate reform and analyzes wealth effect comparatively in total sample interval and thesub-intervals. The cointegrated test, error correction model and bootstrap method are implementedto study on the time series data. Panel unit root test; Panel cointegrated test and panel OLS areimplemented on provincial panel data. The results show that although the house price elasticity in two kinds of data of is different, the variation trend is synchronous. In total sample interval, thewealth effect is negative significantly, which means that the rapid increasing of house price inChina after the reform does not increase domestic demand but producing extrusion effect tohousehold consumption. Comparatively, citizen's disposable income still is the main reason to pullup consumption. In sub-sample intervals, the wealth effect is positive only in 2003-2007 interval,and it is fit for the five-year prosperous of macro-economy. But after the financial crisis in 2007,the house price shows V type fluctuations, and the exorbitant house price produces extrusion effectto household consumption again.Fourthly, disposable income and house price are two endogenous variables which are veryimportant in the consumption model, and their different regimes will make the consumptionfunction non-linear. This dissertation uses threshold regression model and panel threshold model toexam the time series data and panel data in different wealth effect from 1998 to 2011 when theincome growth and house price growth are in different regimes. The result shows that the wealtheffect in high income growth regime is stronger then that in low income growth regime. Themoderate growth regime of house price is much bigger in promote the consumption than over highor over low regimes. But the disposable income still is the main element to promote residentialconsumption. Therefore, only if by increasing the citizen's income and controlling the increasingspeed of house price to the moderate level will the increasing house price promote the domesticdemand effectively.Fifthly, the wealth effects of real estate market and also their transmission ways are differentwhen the house property types are different. Based on the CHNS micro data, this dissertationexplores the coefficient of elasticity in different house property types and also compares the wealtheffects in the year of 2000 and 2009. Then the quantile regression method is implemented toexamine the changing of wealth effects in different property types from low consumption quantileto the high level. Results show that the elastic coefficients are significantly positive. The promotionrole of owner-occupied house property is the strongest, while the promotion power on consumptionof public-occupied house property is the weakest. Particularly the role of rental house is totallyinsignificant, which is corresponding to the analysis results above. In addition, the wealth effect ofyoung consumer is higher than the old no matter in owner-occupied house property or the public ones, which is quite different from the western real estate market. It could be seen that here thevalue of the owner-occupied house is used represent when the houses are necessities. The effect issignificantly positive, which is totally different from the negative testing results above, explains thatthe excessive speculative demand is the main reason of negative wealth effect in real estate marketin China.Sixthly, expanding to macro-economy, the monetary policy will play an important role inentity economy target and macro-economy through the real estate market. This dissertation useSVAR model, Impulse Response Function and Variance Decomposition method to measure thegeneralized wealth effect of real estate market, and analyze its influence on household consumption,economic growth and price stability. The result shows that in the transmission of monetary policyto the real estate, the real estate market plays an important role in the transmission mechanism ofmonetary policy. The conduction role is much more obvious when the money supply becomeintermediate target while is very weak when the intermediate target is interest rate. In thetransmission of the real estate market to consumption, there is not response of consumption tohouse price in the long term. In the transmission of the real estate market to macro-economy, theinfluence of house price fluctuation on macro-economy is significant. The shock of house price willbring in great rising in GDP and CPI in the short-run which means the rapid rising of house pricewill bring in rapid increasing but also instability of economy.In summary, different periods, income gap among residents, different structural differentiationon real estate, and different levels of economic regions'developments all determine thesupply-demand relationships in the real estate market. Therefore when the government makes theregulation policy of real estate market, such situations above should be taken into consideration.One the one hand, the government should appropriately adopt policies to maintain the sustainabledevelopment of the real estate market, drawing house price returns to reasonable level. On the otherhand, the government must avoid excessive regulation that will causes the economy changingdirection. Besides, the government should strengthen its supervision to make sure that the realestate market is running reasonably and effectively, and also should provide a favorableinstitutional environment for the development of the real estate market. Only in that could the realestate market play its role in stimulating domestic demand, promoting economic development, stabilizing the market, and ensuring equity effectively.