China's Economic Transition Period, The Real Estate Growth Cycle Fluctuations

The real estate industry, as the basic and dominant industry, develops in the continuous adjustment and fluctuation process like the macroeconomic business cycle. But the violent and frequent fluctuations will not only do harm to the real estate industry but also lead to the disequillibrium of resources allocation, capital waste, maladjustment of industry structure, adding the difficulty of the investors and even influence the harmonious development of the national economy. We can find that, viewing the development progress of the worldwide real estate industries, the speculation behaviours increased greatly and the nominal assets expanded rapidly in the expansion period, while, in the contraction period, the price of houses fell, mortagage assets in banks devaluated, bad debts increased and thus hasted the contraction of the markets so that the financial crisis would be on the verge of breaking out and the potential development of the real estate market and the national economy would be destroyed greatly.From the early 1950s to the late 1980s, there was not real estate market in China. The allocation of lands and houses resources was under the plan of the government instead of real estate market which was cancelled during that period. Therefore, the real estate market, beginning from the late 1980s, has been gradually growing up during these 20 years, while it has underwent the business cycles from revival, boom, recession to depression.The rapid growth of the real estate industry has promoted the growth of national economy and peoples' living standard level, but there emerge a lot of problems in the current real estate industry, as the expansion period of all real estate industries, such as the rapid growth of investment in real estate industry, speedy rise of the houses price, single financing channel, the contradiction of supplies and demands and the great risk of the bank credit. These problems will play key roles in the business cycle of real estate industry and challenge the persistence development of Chinese economy, thus become the hot and difficult points in current economy.From the macroeconomic point of view, violent and frequent fluctuations will lead to unbalance of industry chains and capital waste thus influence the harmonious development of the national economy. From the microeconomic point of view, the uncertainty of business cycles in the real estate industry will affect the investment decisions and portfolio of the economic agents thus influences the capital allocation. Therefore, the following questions attract peoples' attention: How to apply scientific and efficient methods to identify accurately the situation of the business cycle of the real estate industry and provide reasonable explanation for it in the transition period of our country? Which factors influence the business cycles of real estate industry and to what extend is the influence respectively? How to provide useful information to help the investors to make correct decisions? How to help government to make proper policies to control the economy according to the different features of business cycles? How to avoid the price bubbles in the real estate market.This paper applies the modern international analysis methods, combining qualitative analysis with quantitative analysis, to study the features, formation causes and structural changes of the growth cycles of real estate industry in China. The major research work and innovations are as follows:1. Measuring the fluctuation characteristic of real estate investment growth rate with business index methodIn chapter 3, we construct the business index of the real estate investment with the Composite Index(CI) method, and describe the fluctuation of real estate investment growth rate in China since 1995. According to the criterion of 'from peak to peak', we separate the real estate investment cycles into three parts: the first cycle is from 1996M3 to 1998M12, which was impacted by Asia's crisis; the second cycle is from 1999M1 to 2003M12, which was determined by macro policy; the third cycle is from 2004M1 to now, which attributed to the policy and the pullulation of real estate market.At the same time, we construct the local equilibrium model about real estate investment based on the neoclassic economics, and discuss the factors affecting the fluctuation of housing investment. The conclusions are as follows: (1) this paper discusses the participation of the land factor in the investment equation. The results show that the benefit effect of land is larger than its cost effect. (2) The analysis of the evolution of the price and cost elasticities of investment has found that the main forces that have led new construction, in the sample period, have varied in the recents years. In the model, the elasticity of housing price is higher than the cost's, while the growth rate of housing price is far from the cost growth rate in recent years, so the real estate investment was driven by profits in recent years.2. Constructing the equilibrium price model of real estate with co-integration theory and H-P filterIn this paper, the equilibrium price is calculated using the co-integration theory and H-P filter, as well as the fluctuation degree of the real estate price deviated from the equilibrium price. The conclusion is that the real estate price was lower than the equilibrium price from 1999Q4 to 2004Q1, and higher than the equilibrium price in other stages.At the same time, we discuss the diversified factors, which work on the fluctuation of the residential price, for example demand, supply and availablity of captial. Our conclusion are: (1) in all supply factors, the change of the transactions price index of land has a stronger effect on the residential price; (2) Considered all the captial factors, the interest has a stronger effect on the residential price. At last, through the MTV model, we conclude that the availablity of captial and demand factors had the strongest effect on the residential price fluctuation, but the supply factors were unremarkeable in the sample range.3. Analyzing the difference of real estate cycle among provinces in China with error correction model and panel data model.We find the real estate price in different regions have the same trend, but their growth rates are different through comparing typical provinces' real estate price. According to the economic developing situation, we divide 28 provinces into three regions——eastern, middle and western. Further, we dynamic analyze the factors, which determined real estate price fluctuation, based on error correction model and panel data model. In these models, we consider the impact of monetary policy on house price specially. The conclusions as follows: firstly, to the long-term trend and short-term fluctuation of house piece, the effects of credit policy in eastern region and western region are stronger, and middle region's is weaker. So we think the credit policy is effective to control eastern and western region's house price. Secondly, the effects of interest rate policy have no distinct difference in all regions. Thirdly, in middle region, the development of real estate market is more dependent on its economic conditions. Fourthly, floor space of buildings sold is as exchange volume in the market, and it has the remarkable negative effect on the long-term trend of real estate price in all regions, but its short-term effect on the fluctuation of house price is not remarkable except eastern region.In recent years, the house price in eastern region has been higher than the equilibrium level, so there is potential risk in its real estate market. But in middle region, the development of real estate market is more dependent on its economic conditions and demand factors. In western region, the financing channel is comparatively lack, so the short-term effect of monetary policy is stronger.We also analyse the difference of residential investment fluctuation in three regions with the same methods. The conclusions are as follows: (1)to the long-term trend and short-term fluctuation of residential investment, the effect of credit policy in eastern region is still strongest, specially the short-term effects. So it is effective to control the eastern real estate market. (2) In the short-term models, the housing price is used as a variable describing the demand change.Its coefficient is only remarkable in western's model. It shows that the development of real estate market in western region depends on its economic development level and demand in market.4. Researching the structural break of real estate cycle in China using time varying model.In the chapter 6, we explore the impact of economic break on real estate market using time varying model and dummy variable model. This chapter first studies the interaction between the real estate investment and macro-economy using time varying model. The results are that all three elasticity had an obvious break around 2001, namely the interaction relation between in the real estate investment REI and the macro-economy has an obvious structural change. The output elasticity of investment is rich, so it is an important factor to decide the development level of real estate industry. But the interest rate lacks elasticity. It is not effective in adjusting the real estate market through interest rate. However the change of domestic loan scale has greater influence in the real estate investment.In addition, we research the interaction between the real estate price and macro-economy using dummy variable model. First, we set the range of 1998Q1 to 2002Q1 as the bench mark. We can find that the interest rate played a dominant role in the course of real price change, and the effect of GDP has not remarkable change from 2002Q2 to 2003Q3. The results in the range of 2003Q4 to 2006Q3 are completely opposition. In this phase, the effect of GDP to housing price rised, but the effect of real interest rate declined.5. International evidence of real estate price fluctuations.In the chapter 8, we analyze and compare the relationship between housing price and the macroeconomic factors in Unite State, Japan, U. K. and Australia. In the long-term, the effects of GDP and M1 to price are remarkable in any country at any time, but the effects of interest rate and exchange rate are different in different country at different times. In the short-term, GDP is still one of the dominating factors, and the other factors would change with economic conditions.Further more, we compare the above results with the China model's. The conclusions show that in long-trem the output elasticity of housing price in foreign country are all higher than our country's, but the M1 elasticity of housing price in all country are not difference; in short-trem, the output elasticity of housing price in foreign country are also higher than our country's, and real interest rate and real effective exchange rate have no effect on housing price.This paper applies the modem international theories and methods on business cycles to study the problems in the real estate industry. The study in this paper has theoretic and practical significance from the following aspects: It will benefit the understanding of the transformation mechanism of the real estate market in China and enrich the economic theories of real estate industry, thus contribute to the development and integrality of the theories on the business cycles of real estate industry. It will help the government to identify the situation of the real estate market and make proper policies to ensure the healthy and harmonious development of real estate market. It will help the investors and consumers to understand fully the situation of the real estate market and make correct decisions.