Real Estate Investment And Economic Growth

The relationship between real estate investment and economic growth has long been a popular issue of debate in the literature of economic development. Should a less-developed country encourage real estate improvement as a part of economic development strategy? Or massive-scale housing improvement is just a necessary outcome of economic growth? Based on the quarterly province-level panel data for the period 1999 q1 to 2007 q4, I investigate the long-run and short-run relationship between housing investment and economic growth in China as well as the relationship between share of real estate investment in GDP and GDP per capita and the dynamic volatility in real estate investment, non-real estate investment and GDP in this paper.Recently developed econometric techniques for heterogeneous panel unit root test and heterogeneous panel cointegration analysis are employed. The empirical results provide clear support of Burns-Grebler (1977) hypothesis that both real estate investment and residential investment as percent in GDP are correlated with the levels of GDP per capita in a kind of inverted U-shape manner during the observing period in China. However, the volatility in real estate investment is much smaller than non-real estate investment, which is different from the widespread behavior of real estate investment in US and European developed economy. Finally this paper confirms a stable long-run relationship between real estate investment, non-real estate investment and GDP in China. I then estimate the long-run elasticity of GDP with respect to housing investment for the whole country as well as three sub regions. The variations across regions are detected and reasons for this fact are discussed. Based on the panel ECM, we show that there is bidirectional Granger causality between housing investment and GDP in both short run and long run for the whole country, while the impacts of real estate investment on GDP behave strikingly differently in the three sub-regions of China characterized by their significantly dissimilar level of urbanization.