The Research Of Real Estate Prices’ Impact On Debt Of Private Sectors And Responsive Policies In China

As the proportion of real estate value in social wealth continues to rise,the relationship between the real estate market and the financial market is becoming more and more close.The credit growth related to real estate has become an important factor in the debt expansion.The thesis focuses on the impacts of the fluctuation of real estate prices on the debt level of private sector and debt risk of the economy through bank credit.And based on the perspective of real estate market and bank credit,the thesis provides policy recommendations for dealing with the debt burden of the private sector and debt risk under the downward pressure on China’s economy.First of all,the thesis explains the changing trend of the real estate market and financial system based on the credit creation of commercial banks.Real estate prices have risen rapidly in the past half century,and real estate has become the most important component of the social wealth in developed economies.Recently the emerging economies begins to show the same trend.The ultimate cause is the scarcity of land as a factor of production and the high-income elasticity of real estate demand,and bank credit related to real estate and financial innovations exacerbate the volatility of real estate prices.Based on the theoretical analysis of the credit creation function of commercial banks,this thesis argues that the function of commercial banks in modern economic society is not limited to deposits-taking and lending.More importantly,commercial banks can provide financing for consumption,investment and asset purchase through credit creation.With the rise of real estate prices,the financing for the purchase of existing assets,especially real estate has grown rapidly and greatly,which is also an important factor in increasing the debt burden of the private sector in the economy.Secondly,based on debt-deflation theory,financial accelerator mechanism and financial economic cycle theory,this thesis discusses the role of credit market and real estate market in debt accumulation and macroeconomic fluctuations.On the one hand,the interaction between the real estate market and the financial system will lead to more and more credit provided for real estate mortgage loans,and the economy will enter the credit-asset price cycle: the rise of asset prices and credit expansion mutually reinforce each other.The increase of real estate prices reduces the non-performing loan ratio and enhances financial stability of commercial banks.Meanwhile,the rising real estate prices will further increase the net asset value of borrowers.As a result,banks tend to provide more loans for real estate purchases while borrowers have more financing to buy real estate,further pushing up asset prices.On the other hand,the fluctuation of real estate prices affects the external financing cost of the debtor.Due to imperfect and asymmetric information,the borrower’s cost of external financing is greater than that of internal financing.However,the real estate and other assets can be used as collateral to reduce the external financing premium,so the firms can get loans at lower cost.When the economic system takes a shock,the fluctuation of asset prices will lead to the changes in the external financing premium,which will produce a large change in loans,investment and other macroeconomic variables through bank credit.A key mechanism that triggers or amplifies the business cycle is the fluctuation of asset prices.Thirdly,based on the systematic review of the current status,causes and potential risks of china’s debt,the thesis estimates a MS-VAR model,a SVAR model respectively to examine the debt effects of the fluctuation of real estate prices in China and to validate the theoretical analysis.The results show that the fluctuation of real estate prices has significant effects on the debt of the household sector and the non-financial business sector in China.And the impacts are mainly from two aspects,namely,financing costs and debt structure.From the perspective of financing costs,the rise of real estate prices will lead to a higher external financing premium for firms lacking in real estate as collateral;From the perspective of debt size and structure,the rise of asset prices and credit expansion mutually reinforce each other.As a result,the debt of the household sector will expand,and the financing capacity of firms will be limited through the crowding out effect in the short term,while the debt burden of the corporate sector will increase because of the collateral effect.At last,this thesis analyzes the responsive policies of the major economies after the financial crisis to cope with economic recession and debt accumulation.A PVAR model is estimated to test the effect of monetary and fiscal policies in dealing with real estate credit expansion and debt growth.A dynamic stochastic general equilibrium model including real estate market and financial friction is used to analyze the role of macroprudential policy in dealing with the debt effects of real estate,and explores the choice of policy instruments in the context of “steady growth” and “de-leverage”.The empirical results of the PVAR model show that positive fiscal policy will improve the credit structure in the short term and reduce the proportion of real estate credit in total credit,but expanding fiscal expenditure will positively stimulate asset prices and directly lead to increase in total leverage.Interest rates have a significant negative impact on asset prices,real estate credit and total leverage.The monetary policy of increasing interest rates has played a good role in curbing asset price rises,lowering total leverage and curbing real estate credit.But in the economic downturn,increasing interest rates will also cause a contraction in aggregate demand,and its role in dealing with debt expansion and asset prices is limited.The DSGE simulation results show that when the real estate demand and technology impact occur in the economy,the macroprudential policy of introducing the loan-to-mortgage ratio can effectively reduce the extent of credit expansion and leverage,and the time required for the asset price to adjust back to equilibrium is also deduced;the dual-pillar regulatory framework of macroprudential tools and monetary policy can be more effective in counter-cyclical regulation and curbing the volatility of the credit market and the real estate market than traditional monetary policy regulation.For the policy framework of macro-prudential regulation,this thesis believes that the use of statutory deposit-reservation policy tools in macro-control should be strengthened,and policy-based financial institutions should provide credit support in specific areas to improve the credit structure.The management of short-term capital flows should be strengthened to avoid cross-border transmission of financial risks and exogenous shocks.In summary,the main contribution of this thesis is based on the theoretical hypothesis of commercial bank credit creation to explore the impact mechanism of real estate price volatility on private sector debt level.It is believed that the fluctuation of real estate price not only affects the private sector’s credit demand,but also is important for changing the regulatory constraints such as the balance sheet and capital adequacy ratio of commercial banks,and strengthen the bank’s credit creation ability,which leads to the expansion of debt scale beyond the conditions described in traditional economic theory.The main result of this thesisr is to systematically explore the applicability and limitations of monetary policy,fiscal policy and macro-prudential regulation in the context of “steady growth” and “de-leverage”,and based on the perspective of real estate price and credit market specific policy recommendations are proposed to improve the macro-prudential regulation.