The Relationship Between China's Real Estate Price Variation And Inflation

Inflation is one of the most important research areas in macroeconomics and real estate price is one of the most important problems in modern economy.The real economic situations in many countries indicate that it makes sense to study the relationship between real estate price variation and inflation.Economists believe that although CPI,which doesn't include real estate price,can be used to measure inflation,real estate price and CPI may affect each other through many kinds of mechanisms and sometimes these affects may not be trivial.Many empirical studies have been made on the relationship between real estate price and inflation.Just like many other problems in economics,economists have not obtained some creditable results on some key aspects of the relationship between inflation and estate price variation.And some researches even get conflicting conclusions on the same problem.As for the reason,I believe that the researches on the relationship between inflation and real estate price variation have not taken into consideration the importance of regional differences.And the relationship between inflation and real estate price variation in different regions is not the same.Our country is a great nation with huge economic development imbalances and the basic situations of different areas are of great difference.So I believe it is necessary to study the different relationships between real estate price and inflation in different regions.The first chapter of this paper is the introduction.The first section in this chapter introduces the research background and research purposes as well research significance.The second section introduces the research development in this area both in and out China.The third section presents the structure of this paper.The second chapter is about the relevant theories and models concerning real estate price and inflation,which include the emerge and affect of inflation,wealth effect,Tobin Q theory,financial accelerator theory and the relationship between real estate price and inflation.The first section of this chapter introduces the cause and affect of inflation.Economists have provided many explanations to the cause of inflation,which can be divided into three aspects.The first aspect is the quantity theory of money,which emphasizes money's role in inflation.The second aspect is explaining inflation in terms of total supply and total demand.The third aspect is to explain inflation in terms of the structure of the economy.It is generally believed that inflation caused by real estate price variation is the demand-driven inflation.The affects inflation may have are complex.Inflation usually comes along with the increase of total output.This is why some economists believe that creeping inflation is beneficial to the economy.But at the same time,inflation can also lead to the decrease of total output and the increase of unemployment.The second section presents the wealth effect,the Tobin Q theory and financial accelerator theory.The wealth effect is that people will intend to consume more products if they possess more capital.The Tobin Q theory provides a theory about the connections between asset pricing and investment expenditure.The financial accelerator theory suggests that one of the important affects of incomplete information on borrowers and lenders is that it increases the cost for the bank to acquire enterprises' information.The third section presents the relationship between real estate price and inflation,which emphasizes marginal propensity to save.The third chapter is about the research method and theoretical model.In recent 20 years,with the development of non-stationary time series analysis,especially the development of unit root test of time series data,there has been a thorough change in economists' view on macroeconomic data.A series of analysis indicates that most of the macroeconomic data series are non-stationary.This has imposed great impact on the analysis and modeling of macroeconomic data.The first section of this chapter presents the unit root test and co-integration test.The precondition for the existence of a co-integrated relationship between two variables is that they have the same number of unit roots,that is integration of order one.So unit root test is the precondition of co-integration test.Co-integration is a powerful test and it allows us to describe the balance or stationary relationship between two or more time series. Engle and Granger first proposed the theory and method of co-integration.They also pointed out that the combination of two or more time series may be stationary and if such a combination exists,we can say that these time series has a co-integrated relationship.The second section of this chapter introduces the vector error correction model.Engle and Granger combined co-integration and error correction model to form vector error correction model,which is VEC for short.A VEC model can be considered as a VAR model with a co-integration constraint and it is widely used in the modeling of non-stationary time series between which co-integrated relationships exist.The third section is about the pulse response function and variance decomposition.The pulse response function describes the affect of one endogenous variable on other endogenous variables.And variance decomposition is used to evaluate the importance of different structure shocks by analyzing the contribution of every structure shock to the changes of endogenous variables(usually measured by variance).The fourth chapter is the empirical study of the relationship between our country's real estate price and inflation.And this is key part of this paper.We take two cities Beijing and Shanghai as examples.We make a co-integration test of real estate price in Beijing,real estate price in Shanghai,total output and inflation rate.A vector error correction model is built and the results of pulse response function and variance are presented.The results indicate that the short term affect of inflation on real estate price in Beijing is larger that the long term and the long term effect of inflation on real estate price in Shanghai is larger that the short term.In short term, real estate prices don't have much affect on inflation both in Beijing and Shanghai. But in the long term,real estate price in Beijing has larger affect and inflation has smaller affect on real estate price in Beijing.Real estate price in shanghai has a comparatively smaller affect on inflation and inflation has a larger affect on real estate price in Shanghai.Total output has a larger affect on real estate price in Beijing than in Shanghai.This means that real estate price in Shanghai has more power to predict inflation and its ability to confront inflation is also stronger.If inflation comes along with the increase of total output,real estate prices both in Beijing and Shanghai will rise and if inflation only leads to the rise of price,then real estate price in Beijing is less affected.Our country is a great nation with huge imbalances in economic development. Different areas have very different conditions.As for the areas where there is a strong connection between real estate price variation and inflation,we can use real estate price variation to predict inflation.As for the investors who hedge inflation using investment in real estate,it is vital to choose the right area as in some areas, the investment in real estate can hedge from inflation effectively and in some areas the investment in real estate cannot hedge from inflation.