Applying Minsky’s Theory Into China’s Housing Market

The volatility and fluctuations of real estate prices have often triggered severe financial crises at regional or even global level. Since the acute US housing market crash and the subsequent global Great Recession in 2008, real estate has once again become a priority concern of governments and scholars all over the world.Minsky emphasizes the nexus between the financial market and the economic cycle. The cycle he suggests is well supported by looking at previous cases in history and the 2008 global financial crisis was the latest evidence.. He believes that economy has two different financing regimes under which it is either stable or unstable. And it is the pro-cyclical nature of credit that moves the economy from stable towards unstable and eventual crisis, during this process there are five stages:displacement, boom, euphoria, profit flight, and panic. Usually, a relatively minor event pricks a bubble, but once the bust breaks out, the bubble cannot "inflate" again and the economy fall into a panic stage where asset prices reverse the course and fall as rapidly as they have risen, causing sharp contraction in financial markets and the economy collapses, which is coined as "Minsky Moment".China’s housing market has experienced extraordinary boom since the reforms launched in the mid-1980s, accompanied by substantial rises in residential property prices. Indicators such as price-to-rent ratio show that housing bubble has already been created in China. However, China’s housing market is not a typical bubble, especially when analyzing cash flows in Chinese housing market with the application of the Minsky’s theory. China’s housing market is structurally different from that of the US or EU countries in two aspects:New property sales are dominant and land developers’financial condition sets the tone for the market price; In China, buyers in the housing market are well-to-do and have purchasing power notwithstanding low leverage. This distinct structure also indicates that the bubble in Chinese housing market will burst in a different way:the property developers’ access to credit has become a barometer of bubble and bust in the housing market in China.Therefore, this thesis will focus on the correlation between property developers’ access to credit and the fluctuation of house prices. Granger causality test is employed to examine the relationship between these two variables. And the results demonstrate that the house prices and construction firms’ credit are the Granger Causes to each other, at the confidence level of 90% and 99% respectively, meaning that there exist two-way causality between the two variables.Based on the theoretical and empirical studies, this thesis offers the following policy recommendations:first, control the amount of loans to house developers, curb its growth rate and reduce the fluctuation of housing credits; second, change the structure of lending for housing to encourage more investments in the development of the economically affordable houses and of houses in rural cities in Middle and West China. Third, examine the financial conditions of house developers, carefully investigate all the loan propositions and strictly punish banks for violations in the disbursement of loans.