Empirical Research on the Determinants of House Price Behaviour in China, From January Quarter 2000 to December Quarter 2008

Abstract The house prices in China have increased dramatically after the housing finance market reform since 1998. The housing market boom has contributed to domestic consumption, investment and rapid economic growth. But at the same time, many Chinese people have experienced increasing difficulties to purchase a house as the run-up house prices become too expensive relative to household income, rents and it seems will never fall. This problem became more severe in metropolitan areas, such as Beijing, Shanghai, Hangzhou and Shenzhen. As the housing problem is not only highly related to family life, but also to the economic growth and financial stability, it turns out to be a concern nationwide. Some academics argue the high house price is contributed by the development of macroeconomic fundamentals, while others believe the house price growth is due to speculation. The People’s Bank of China (PBC), which is China’s central bank, has implemented policies, for example, rising personal housing mortgage rate and benchmark lending rate to control the growth of house prices, but has received limited effects (Shang, 2009). Those complex phenomena raise the question about what are the key determinants of house price growth in China. In order to find answers to this question, this paper is going to explore the relationship between housing price and a series of variables by four time series regression models using the Ordinary Least Square (OLS) technique based on empirical data from 1st quarter 2000 to 4th quarter 2008. The tested variables include GDP, CPI, land price, bank lending, real benchmark lending rate, real effective interest rate, and Shanghai Composite Index. It is found that in general, China’s house price growth is highly associated with the improvements of its macro-economic fundamentals. In particular, GDP growth, CPI growth, land price growth, expansion in bank lending and rise in equity prices are positively correlated with the house price growth, while the real benchmark lending rate and the growth in RMB appreciation are negatively correlated with house price growth. Beside, the limited supply of cheap housing, a lack of competition in the land transfer market, and political incentives to local governments also contribute to the increase in house price. Therefore, it is suggested that the Chinese government should not only implement monetary instruments, but policy measures to stabilize house price growth and maintain sustainable development of the domestic housing market