Real Estate Pricing In China How Financing Options And Pricing Determinants Can Assess Whether Or Not Prices Are Aligned To Their Fundamentals

Over the last decade Chinese properties experienced a sharp increase in value reaching levels that has never been experienced before. Meanwhile, its financial markets are developing, introducing new instruments, leading to a broader set of options for investors and borrowers, and increasing its complexity.A growing interest among academicians as well as media and general public has occurred. Government in turn manifested its concern through recent policies aiming to contain real estate prices and keep stability in financial markets.The main object of this article is to assess whether real estate prices are aligned to their fundamentals, and identify which ones better explain the actual level of prices. This paper is also focused on analyzing the financing options available for real estate developers and see how they can affect financial market’s stability.Findings show that some variables are impacting prices differently than expected, population growth for instance is negatively related to prices, or to be more precise the slower growth of population didn’t stopped price. Investment in fixed asset and construction activity are positively related to prices even though most of economics’theories foresee the contrary.On the other hand when actual prices are compared to the ones predicted by theoretical models, findings show that in the majority of Chinese cities price are aligned with their fundamentals. However this cannot be said for the mass market in Shanghai and Shenzhen and the luxury segment in Beijing and Nanjing which showed sign of overvaluation.Finally this paper concludes that an increasing interest in financial innovations has been seen among real estate developers as well as investors, with particular attention to REITs, private equity financing and the securitization process.The Government however is well aware of both, the increase in real estate prices and the expansion of financing options and practices. In fact it is pursuing policies addressed to contain price growth without having them decrease causing a slowing down in consumption as well as in the field industry related to real estate. Additionally new regulations has been implemented in order to prevent an excessive leverage leading to potential instability of both the property prices and the financial markets.