The Impact Of Fluctuations In House Prices On Urban Household Consumption

With the vigorous development of the real estate market throughout China, real estate has become an important or a pillar industry in the cities. It contributes significantly to local economic development. Rising house prices give real estate developers enthusiasm in land development and real estate investment, which stimulates local economic growth. However, with prices in major cities continue to rise beyond the tolerance limit of ordinary urban residents, they have a major impact on urban household consumption. This has become an issue of widespread concern from all walks of the society. The impact of real estate price fluctuations on consumption involves two major areas of study: the real estate industry and consumer research, and will help solve two major problems for China: housing and consumption. This article is based on this background, carrying out an in-depth study on how fluctuations in house prices affect consumption of urban residents, combining quantitative analysis and qualitative analysis to study how real estate prices relate to the residents'disposable income levels and consumption levels. It provides references and theoretical basis for furthering addressing the issue of affordable housing and the healthy development of the real estate industry and thus has important theoretical and practical implications on the promotion of national economic growth.This first chapter begins by describing the research background, research significance, and research content and structure. In recent years, China's real estate prices continued to rise, arousing widespread interest. The relevant statistics show that: in China in years 2002 -2005, and in 2006-2007, real estate prices continued to rise, and real estate market becomes more prosperous. The increasing influence of real estate prices on consumption are getting more and more attention from the by academic community and the government. The government has consciously developed the real estate market to boost consumption and stimulate economic growth. In this process, in many places, land is turned into an asset. The revenue of local government is increased due to the sale of land, which leads to the emergence of"prime sites"in some cities, and sky-high price of land further pushed the real estate market into irrational exuberance. This development trend has aroused great attention of government departments. Relevant departments have also taken a lot of measures to curb price rise, but the effect is not very significant. In 2009, house prices in 70 major cities nationwide grew by 7% annually on average. In some big cities, such as Beijing and Shenzhen, the annual growth rate in house prices reached more than 10%. In this situation, the increase in house prices far exceeds the increase in the general population's consumption, thus has a major impact on the part of consumption that is house purchase. Because of the consistent increase in house prices, and the corresponding consumption expectation people have on house purchases, it tends to suppress other areas of consumption in order to speed up the purchase of a house. Therefore, the current study on the impact of house prices on consumption is extremely meaningful.This second chapter describes in detail the housing consumption of China's urban residents, also reviews the literature. It mainly analyzes the change in housing consumption of China's urban residents since the housing reform of 1998. House price and rent market price mechanism has been established. More residents now own their own home via purchasing. Market-based allocation has become the most important channel for housing consumption for urban residents. An in-depth analysis of the reasons for the rapid house price increase in recent years, indicates that there are multiple reasons: rapid economic development, urbanization, raw material price increase, real estate speculation, etc. We study in detail these channels on how house price fluctuation affect consumption. Then, we review research on the house prices and consumption by domestic and foreign scholars. For a long time, a considerable portion of foreign scholars, mainly use the wealth effect of real estate to analyze the impact of property prices on consumption. Real estate wealth is an important form of non-monetary wealth held by a homeowner. From the theoretical point of view, fluctuations in housing asset prices led to changes in the real estate wealth, thereby affecting the owner's consumption, and thus the wealth effect of the real estate market exists. Compared with the international real estate and consumer research, most scholars have found that in China's real estate market, there is no wealth effect. Namely, real estate prices have an inhibitory effect on consumption based on the permanent income hypothesis and life cycle hypothesis.The third chapter is to study the selection of research method and model specification. This chapter mainly prepares for the subsequent empirical studies. It introduces several panel data models and panel data tests. Then, it sets an initial model for studying house prices and consumption.The fourth chapter is the core part of this thesis. First, variable selection and data processing are carried out. We use the annual data for 2000-2008 and the quarterly data for 2003-2008, for a sample of 24 cities. As urban consumption expenditure per capita is mainly affected by income, therefore, in the analysis of the annual panel data for 2000-2008, the average sales price of houses, and the per capita disposable income are used as the explanatory variables; consumption of urban residents is the variable to be explained. In the analysis of 2003-2008 quarterly panel data, house sales price index are used instead of the average sales price of houses, mainly because of the availability of the index data. From the study of US house price statistics data of 1970-1990 by Dipasquale and Wheaton, price index and sales prices are basically consistent with each other. Let denote the current period per capita consumption, denote the current time-period urban resident disposable income, denote current time-period average house sales price; denote house sales price index, cit y ithpit hpiitμit denote other external factors. Data are processed to eliminate the impact of inflation. Then the variables are tested for stability. Two commonly used panel data unit root test methods are employed: LLC (Levin-Lin-Chu) test and the Fisher-ADF unit root test. Based upon the results of the tests, fixed-effect models are employed to analyze the panel data. We use the annual data for 2000-2008 and the quarterly data for 2003-2008 to estimate the effect of house price fluctuation on consumption, for a sample of 24 cities. This empirical analysis shows that in most cities, when house price goes up, personal consumption goes down, which means that the majority of the households need to squeeze consumption to pay for the higher housing cost. Considering Fixed-Effect Model in changing coefficient circumstances, Consider the fixed effect model of house prices with variable coefficients, the effect of house price fluctuation on consumption is different in different cities. That is, if house prices rise normally and within the affordability limit of urban residents, it will promote consumption. If it is irrationally rising, it will restrain urban consumption, and have a crowding-out effect. We think many factors contribute to this difference. From a deeper level, it is the level of economic development between cities and consumption culture that affect the purchasing power of urban households and purchase intentions.Both the wealth effect and the crowding-out effect from rising house prices cannot be overlooked. How to make good use of the wealth effect in the real estate market to play a role in the promotion of consumption, while reducing the negative consequences of crowding-out effect, is essential. At present, China is at a critical period of economic development. House prices in some cities are not conducive to the implementation of policies to stimulate consumption and not conducive to regional economic development. To control excessive house price increases, we need to prevent the formation of the real estate market bubble, and regulate the real estate market at different levels; it is necessary to consider the different types of needs, but also take into account regional differences. Of course, a fundamental solution to housing problems is to raise income levels, and to reduce the income gap.