Study On Wealth Effect Of Real Estate Market In China

According to the early foreign studies on the Wealth Effect as well as the statement that Gottfried Von Haberler and Arthur Cecil Pigou once put forward,"With other conditions remain unchanged, the changes in money balance and perceived wealth will lead to changes in people’s spending behaviour." Hence, we usually define the Wealth Effect as the encouraging or discouraging effect on consumer demands caused by the value changes in assets accompanied with the value changes in wealth. Early in1971’s report, F. Modigliani estimated that households increase their annual consumption by approximately5cents for every additional dollar of their wealth. Generally speaking, as household wealth ismostly involved in financial market and property market, the Wealth Effect should be accordingly separated into Financial Market Wealth Effect and Property Market Wealth Effect.In domestic market, we can see from the one side, property market has becoming more monetized, commercialized and socialized since the reform of the housing distribution system in1998,resulting in the booming of the property market with a10%annual compound growth on the commercial housing prices. By2012, the national average commercial housing price was RMB5,791per square metre, increased by8.1%YoY; commercial housing sales volume was6.4trillion, increased by10%YoY; property investment size was7.2trillion, increased by16.2%YoY. Based on the report carried out by China’s Family Finance Research Centre of South Western University of Finance and Economics, the average housing asset per family was RMB930,000that made up of37.56%of total household assets, which goes far beyond the percentage of4.52%made up by financial assets. Meanwhile, the booming housing price lead to domestic housing price-income ratio of6.0regularly, and the ratio even reached8.2in2009. According to the World Bank report, the rational housing price-income ratio should be maintained within the range of4.0-6.0, it would be considered as a property bubble if the ratio exceeds6.0in developed countries. Case et al (2005) indicated that, excessively high housing price might cause the Crowding Out Effect on consumptions.On the other side, affected by the International Financial Crisis, export size has significantly declined. To maintain the rapid and healthy growth of economy, stimulating domestic demand has become extremely important. In the12th Five-Year Plan,"Expanding Domestic Demand" policy was first specified and edited as a single chapter by government. Furthermore, this idea has been emphasized once more in the report of the18th Congress of Communist Party of China (CPC) stated,"Focusing on expanding domestic demand, accelerating the cultivation of a series of new and powerful growth points of consumption, promoting investment stability and structure optimization"."How to carry out with correspondent policies incontrolling the property market and expanding domestic demand to achieve the ultimate aim of develop domestic economy" has become a significant problem that arouses growing concerns by both government and researchers. This article is based on acknowledged theories and references on Consumption Function and Wealth Effect, considering the unique background of Chinese property market, carrying out thorough analysis on the transmission mechanism of Chinese property wealth effect and observingits behaviours under different housing price intervals by applying panel data.This article applies panel data in comprehensive judgements towards domestic property market wealth effect in the first place. These research findings show that household consumptions are mainly affected by income. On average, consumer spending increases about0.886%for every additional1%of per capita income. By contrast, the property wealth effect does not change significantly, for every1%increased in housing price, resulting in only0.047%increased in consumer spending.Then, this article observes from a time dimension of year1998to2011and divides it further into two time intervals:1998-2003and2004-2011to compare and contrast the level of property market wealth effect under different growth rate of housing price. For year1998-2003, it was considered as a stable developing period of domestic property market with the average housing price growth rate of 3%. After this period, due to the action that national policies and measures took property industry as the national pillar industry and local government’s promoting attitude towards property industry, property industry has moved into a rapid development period. During2004to2011, the housing price growth rate remained at about10%. Based on regression analysis using panel data towards this two different period of housing price growth, we can work out that the property market wealth effect index is approximately0.045for the time interval1998to2003with a relatively flat growth rate, and the index is-0.078for the time interval2004to2011with a relatively higher growth rate than the former period. This negative effect on domestic property market is caused by the excessive housing price accompanied with a high housing price-income ratio, which eventually lead to the "Crowding-out Effect" on consumption. For those who have already purchased properties, they have to bear higher mortgage payments; for those who were renting a house, they must pay higher house rental; and for those who decided to purchase a property, they have to hold a higher amount of savings to deal with future payments. Besides, the lagging housing mortgage loan market and traditional housing purchasing idea can also give rise to a negative property market wealth effect.In conclusion, currently, the relatively high domestic housing price has led to high living cost to people and crowding-out effect towards consumption. The cause to high housing price is complicated. Hence, government should take the practical factors into account when carrying out property market controlling policies. For the one side, the government should carry out some appropriate policies to maintain the sustainable development of property market and get the housing price back to a reasonablelevel; on the other side, the government should also avoid over-regulation causing unexpected shift in economy. Besides, government should increase surveillance and supervisory, guarantee the effectively implemented of property market regulations, provide a healthy and desired external environment for property market, and eventually play the competent role in expanding domestic demand, improving economic development, stabilizing the market and ensuring the fair distribution of benefits.