Research On The Relationship Between Economic Structural Imbalance And Housing Prices

Real estate market plays an important role in Chinese economy. Housing purchase is one of the most important expenditure in a family. Unusual housing price fluctuations affect the stability of economy as well as social welfare in China directly. Therefore, it is very important to study housing price fluctuations and the characteristics of housing price cycles.What causes housing price cyclical behavior of housing prices? Based on theoretical analysis and empirical studies, this paper examines price fluctuations due to both demand and supply factors. Demand factors include growth of household incomes, urbanization induced demand, demographics changes; supply factors include government regulations on lands, and real estate development financing innovations & regulations etc. Existing literature only addresses possible reasons for housing price fluctuations; but do not offer in-depth analysis on the cyclical behavior of housing prices, and reasons behind that. This paper proposes a new understanding of the cyclical behavior of housing price fluctuations-the deviation of housing prices from the long term average is a reflection of economic structure imbalances. Housing prices plays an important role in the transition of imbalance to balance of economic structure.Based on housing price cycles of foreign countries as well as the housing reform in China, this paper examines real estate market and macro economy in China, and hypothesizes the relationship between macro economic structure imbalance and housing price cyclical fluctuations. With the use of panel data in China, our main findings are as follows:First, housing price is the "absorber" of macro economics structure imbalance. The deviation of housing prices from its long term average reflects the transition of economic structure from imbalance to balance. When the problem of economic structure accumulates, unusual housing price fluctuations absorb the risk associated with imbalance of economic structure. Meanwhile, housing price fluctuations also gives more time to the government and policy makers to realize the problem and come up with plans to solve the problem. However, if the government does not recognize the root of the problem, and make policies to control the price of housing for the sake of controlling prices, it may have the risk of not handling imbalance of economic structure properly. Rather serves as an absorber for economic risks, housing prices may become a magnifier for such. Without proper policies, housing prices may lead to macro economic cycle correction.Second, based on observation of Chinese experience, this paper proposes the relationship of economic structure imbalance and housing price cyclic fluctuations: monetary disequilibrium, real economy imbalance causes unusual housing prices fluctuations; demographics causes unusual housing price fluctuations; income distribution imbalance causes housing price fluctuations; foreign economy imbalance, external imbalance causes housing price fluctuations; fiscal policy failures causes housing prices fluctuations.Third, empirical studies basically support our theories. On the national level, there are always signs before the actual economic structure imbalance appears. Because the real estate market, economic development, degree of marketization, and urbanization all progresses at different paces, the effect of same factors on housing prices differs in each region. Among those, external imbalance does not affect much on housing prices in central and northern China. Income distribution imbalance has no obvious effect on housing prices on western China. Overall, money supply and demographics imbalance have significant effect on housing prices on all regions in China. In addition, the dependency of local government's revenue on land sales certainly contributes to the increases of housing prices.Forth, the theories as well as empirical studies have significant meaning on the government policies. With housing prices stays at the high level, policies directly targeting at housing prices only solve problems temporarily. Those policies may also delay the reform of economic structure. Unusual housing price fluctuations just reflect the economic structure imbalance. Therefore, effective policies should target the restoration of economic structure imbalance. Those policies may include optimizing monetary policy, better managing money supply, improving income distribution equalities, increasing household income, relaxing one-child policy for balancing demographics, increasing the flexibility of foreign exchange for promoting RMB's internalization. and increasing internal demand for balancing internal and external economy. Fiscal policy should institutionalize tax policy within the province while replacing treasury function to decrease local government's dependency on land sales for its revenue.The theoretical framework and empirical studies from this paper is still somewhat preliminary. However, along the thoughts developed in this paper, others can accomplish many more meaningful studies. For instance, with further study of housing prices cyclic fluctuations, one can establish a better policy for economic stability. In addition, housing prices data from foreign countries can further support the theories in this paper.