Research On The Correlation Mechanism Between Housing Price Dynamics And Economic Fluctuations In China

The Great Recession,triggered by the US real estate bubble burst in 2007,has sparked prominent topics about the correlation mechanism between housing and business cycle.Since the reform of urbanization and housing commercialization in 1998,China’s real estate industry has experienced rapid development for more than 20 years.It once became a "pillar industry" to promote economic development,which not only led to the kidnapping of the macro-economy by the real estate market,but also caused the soaring housing price,overheating of the real estate economy and other problems.In recent years,China has witnessed a great housing market boom,accompanied by decline in household consumption growth,capital shifting from real to fictitious,high macro leverage and local governments’ land finance behavior.Motivated by these facts,this paper conducts a theoretical and empirical research on the internal correlation mechanism between housing price dynamics and China’s macroeconomic fluctuations,according to the rigorous logical order of "finding problems → empirical test → theoretical proof".This research work is not only conducive to understanding the operation mechanism of China’s macro-economy,but also of great significance to improve the effectiveness of macroeconomic policies.In Chapter 1,the research framework of this paper is established,including the theoretical basis,specific research content and methods.Chapter 2 first introduces the relevant system and policy arrangements to promote the development of China’s real estate market.Then,using Chinese macroeconomic data,we identify the characteristics of housing price volatility and its linkage with the key macroeconomic variables such as household consumption,real investment,credit scale,land price and local government debt.Empirical analysis shows that housing price has negative correlation with household consumption and real investment.In addition,there is a positive co-movement between housing prices with the total credit.In particular,house prices are positively correlated with household loans,but negatively correlated with corporate credit.On the last hand,there is a strong positive co-movement of housing prices with land prices and local government debt.In Chapter 3,an extended NK-DSGE model including heterogeneous households is constructed to analyze how housing price dynamics affect real economy through the consumption channel.It is found that the heterogeneity of household liquidity constraints and exogenous shocks driving house price are the key factors to generate negative comovements between house price and household consumption in China.For the households with liquidity constraints,the tightening effect of increasing housing demand on budget constraints is far greater than the loosening effect of rising house prices on mortgage constraints,which leads to the expansion of household debt and the decrease of consumption expenditure.For households without liquidity constraints,although rising house prices will increase their wealth income,the increase in consumption spending is relatively small.Collateral effects on the household allow matching the co-movements between housing prices and consumption.The higher households’ loan-to-value ratio is,the stronger the collateral effect is.Particularly,the financial accelerator depends on where the shocks come from: this model features an accelerator of credit supply shocks,and a "decelerator" of housing demand shocks.In Chapter 4,an extended NK-DSGE model which can depict the characteristics of China’s economy shifting from real to fictitious is constructed to analyze how house price fluctuations affect the real economy through the investment channel.It is found that in the credit-dependent economy with underdeveloped financial markets,housing is not only an important asset held by household sector,but also an important mortgage asset for external financing of the enterprise sector.The specific exogenous shock will trigger competing demand for real estate between households and entrepreneurs,which has a dynamic multiplier effect on the real estate price through credit constraint mechanism,amplifying maroeconomic fluctuations.We propose a dynamic general equilibrium with entrepreneurs’ portfolio decision between housing and productive capital.The sharp rise of house price will increase the liquidity premium of real estate,resulting in a rapid rise in the return on housing and exceeding the return on production capital.Entrepreneurs who pursue profit maximization rationally allocate more funds to real estate investment,and correspondingly reduce traditional production.As a result,more credit is allocated to housing market,squeezing out real investment.In Chapter 5,an extended RBC-DSGE model with capital constrained financial intermediaries is constructed to analyze how house price fluctuations affect the business cycle dynamics through credit supply channel.In this model,housing assets as common collateral assets for the household-borrowers and entrepreneurs’ external finances are introduced.In this context,house price changes not only affect the total amount of credit supply of commercial banks,but also affect the allocation of credit between different sectors.Our simulation results suggest that a credit-driven housing boom make the loans be redistributed by bankers away from a relatively productive entrepreneur sector to a relatively unproductive household sector,the crowding-out effect of housing boom on corporate investment surpass its relaxing effect on entrepreneurs’ credit constraints.As a result,credit resources are mismatched,affecting macroeconomic fluctuations.In Chapter 6,an extended NK-DSGE model including the local government’s "land finance" behavior is constructed to analyze how the price fluctuation affects the business cycle dynamics through the land finance channel.This model predicts that a credit-driven housing boom promotes the housing developers to increase the housing development and land demand,and then drives the rise of land price.Furthermore,an increase in land price facilitates an expansion of local governments’ fiscal revenues and infrastructure investment,which further promote households’ housing demand.Local governments’ land financial behavior forms a positive closed-loop feedback mechanism of "house price rising → land finance → house price rising" and provides an important channel to amplify housing prices and Chinese business cycles.As a result,the Chinese economy is tightly linked to the real estate sector.In general,this paper first extracts the typical facts of China’s real estate market observed in the data.Then,some empirical analysis work has been done to explore the specific transmission channels of China’s housing prices affecting economic fluctuations.Finally,the DSGE models that can replicate the Chinese empirical patterns are constructed to understand the underlying mechanism of the co-movements between housing price dynamics and China’s macroeconomic fluctuations.