Research On Real Estate Price Fluctuation And Financial Risks

The real estate industry is one of important pillar industries in our national economy. Since1998, with the housing commercialization reform, the real industry has gained rapid development, making considerable contribution to the whole economic growth. Meanwhile, the real estate price has increased quickly, with the price in some cities and areas soaring to an unacceptable level. The high price level and rapid growth rate have raised up more and more concerns and debates on the risk of "real estate bubble".An accompanying topic under hot discussion is the financial risks caused by real estate bubble. It is known to all that the real estate industry and financial system have close relationship. On one hand, the real estate industry is a fund intensity industry, with large fund demand. The distinctive characteristics of our real estate funding system is that real estate industry is over dependent on bank loans, with the proportion of funding from other channels very small. According to the research of the Central Bank of China,55%of the real estate developing capital,80%of land purchasing capital is from bank loans. On the other hand, in the period of real estate prosperity, the high rate of return on real estate investment would attract huge funds from different sources, with banks providing a great deal of loans to that area too. However, the excessive loan concentration in real estate industry goes against to the principle of risk diversification and would leave banking institutions being exposed high risks. In recent years, the ratios of real estate loans to the total loans in domestic main commercial banks have reached a warning level, with25-30%on the average. Almost all cases of real estate bubble and financial crisis in the history have direct relations with the loan expanding of bank system, for example, the real estate bubble and the saving&credit industry crisis in the Unite States, the real estate bubble of economic crisis in1980s in Japan, the Asian financial crisis in1998, and so on. It is undoubted that a stable finance system is of utmost importance for any country. The fact that the real estate industry is over dependent on bank system for funds and the bank system exposes itself excessively in real estate industry indicates that the inter-acting relations between the two industries is especially close, which imply that the financial system in our country is more sensitive to the fluctuations in real estate area and would suffer more once there be unfavorable variation in real estate industry, such as the decline of real estate price. Therefore, it is of great practical significance to analyze the influences on financial system caused by real estate price fluctuation for regulating the real estate industry, stabilizing the price, avoiding adverse impact caused by abnormal real estate price fluctuation and prevent financial risks.Specifically, the main contents of this paper include the following aspects:(1) How does the real estate bubble form and why it would appear? In Chapter2of this paper, starting with the theory of fictitious capital and expectation, we introduce an econometric model to explain the forming mechanism of real estate bubble. As the real estate is more and more considered as investment commodities, its price is growingly less related with its cost or natural property but more and more related with pure market factors, resulting in more abnormal fluctuations, even bubbles. With the help of the econometric model, we analyze the mechanism of how bank loans facilitate the form of real estate bubbles, revealing the close relationship between real estate industry and financial system from a theoretic perspective and providing a theoretic basis for empirical analysis in the following parts of this paper.(2) How do financial risks or financial crisis form and how does the real estate price fluctuation causes the accumulation of financial risks and even crisis? In Chapter3, we introduce an econometric model of bank’s return-maximization to interpret what kinds of factors impel the expansion of bank loans to real estate industry. The result of the analysis indicates the high rate of return on real estate investment and the optimistic assessment on default are the main facilitating elements. Furthermore, we spread the analysis to demonstrate the process and mechanism of how real estate bubble could result in financial crisis through picturing the representative cases of bubble and crisis in Japan and United States. (3) How to judge the level of the present real estate price in china and is there any severe price bubble? The high price level and too rapid growth rate have become common view of the public, but there are still controversies on this problem in academic and business circles. In Chapter4, we provide a general analysis on the level of real estate price by comparing the price level with the economic base and residents’ affordability for housing. After that, with a purpose of giving an objective and reasonable judge on the present real estate price, we spread the analysis to building a real estate price model to test whether there is any bubble in china and three typical cities, Beijing, Shanghai and Chongqing, and measure the degree if there be. The result finds that the price level in China is in a relatively stable state in general, with no serious bubble tested in our model. But the price level in Beijing and Chongqing deserve our special attention.(4)To what extent the bank system is exposed in the risk of real estate price fluctuations and how is banks’ capability for resisting risk from real estate? There have been considerable concerns about whether the banking system is safe if the real estate price would decline sharply. In Chapter5, we first analyze the bank system’s risk exposure degree through two indices:the proportion of real estate loans in the total loans issued by bank system and the proportion of fund from commercial banks in the total funds used by the real estate industry, which indicates that the exposure degree has reached an alerting level. Then we build a SUR model to perform stress testing on the main commercial banks of4categories. The result of stress testing indicates that the decline of real estate price would exert adverse impact on all commercial banks of4categories, with the City Commercial Banks most vulnerable to the real estate price decline.(5)How to regulate the development and operation of the real estate industry and finance industry to ovoid price bubble and prevent financial risks? In Chapter6, on the basis of drawing on the experience of real estate regulation from the developed countries:the United States, Germany and Singapore, we provide some ideas and suggestions for enhancing the regulation on real estate market and preventing financial risks. We suggest that the government should improve the measures in leading the construction of social housing system for residents with medium and low income, and strengthen the regulation on commercial housing market. The main innovations of this paper lie in:(1) The paper adopts "basic value method", not the method of indices and statistic testing which are subjective or unstable in results, to build real estate price model to test the bubble and measure the degree of bubble. In the analysis, on the basis of discriminating the part driven by economic factors and the part driven by real estate speculation, the paper tests the bubble in the whole country in general and three typical cities quantitatively. The analysis specializes itself at that it focuses not only on the general price level in the country but also pay attention to the cities having an active real estate markets, not only analyzing the bubble impelled by the price growth, but give analysis on the bubble promoted by people’s conformity behavior.(2)The paper build a SUR model to conduct stress testing on commercial banks, which has the advantage of covering both the difference among different banks, such as differences in size, management capability, operation efficiency, and the close relations among them, making the analysis more complete and reasonable. More important, the paper use Monte Carlo Simulation Method to exam how vulnerable the commercial banks are if the real estate price decline considerably and recognize the most vulnerable banks, which contribute to the reliability and precision of the analysis results.