Credit Expansion And Real Estate Bubble In China

Existing cases of real estate bubble show that the credit expansion is highly correlated with the real estate bubble, that is accompanied by rapid and continual increases in real estate price, the credit Support from financial sector to the real estate sector will also increase; Similarly, as substantial increase of credit support from financial sector to real estate sector, real estate price will increase sharply. Although the historical background and economic consequence of these bubble cases are different, the phenomenon that credit expansion is highly correlated with the real estate bubble is a kind of stylized fact. Based on the stylized facts, this paper promotes three questions that are closely related to it, and regards these questions as the logic thread to deduce and outline the entire framework of the study.The first question is what effect does credit expansion react to real estate prices. The answer for this question should be analyzed beginning with the dynamic relationship between credit expansion, real estate prices and income. From the perspective of literature research and theoretical analysis, this paper proposes its research hypotheses among three aspects, including the relationship between real estate cycle and credit cycle, the game system among government, property developers and banks, and the mechanism of monetary policy on real estate market. Using quarterly data from 1995 to 2010, the paper establishes a structural vector autoregressive (SVAR) model to make an empirical study on the dynamic relationships and iterations between China's credit expansion (money supply, credit, interest rate) and real estate price. The results show that money supply expansion and interest rate contraction both have stable long-term pulling effects on housing price rising, but the effect of housing price rising on money supply mainly focuses on short-term contraction and that on interest rate mainly focuses on long-term simulating effect. Meanwhile, money expansion has long-term promoting effect on housing price, and the later both have short-term pulling effect and long-term simulating effect on the former. Based on this, the paper concludes that the money supply instrument and credit instrument are feasible to peg housing price target, but interest rate is not feasible to peg housing price target.The second question is what relationship exists between credit expansion and the national real estate bubble. The answer for the question should be analyzed beginning with the measurement of the national real estate bubble. Regarding value of real estate as a state variable and using quarterly data from 1995 to 2010, this paper establishes state space models to estimate the value of real estate with the help of Kalman filter. The results show that changes of Chinese real estate bubble appear characteristics of a significant rise in different stages, In the first phase (1995Q1-1996Q4), the mean bubble rate is-9.62%, there appears no housing bubble. In the second phase (1997Q1-2000Q3), the real estate bubble began to emerge, the average bubble rate is 6.85%. In the third phase (2000Q4-2004Q1), the bubble showed the trend to enlarge, the mean bubble rate reaches 11.16%. In the fourth phase (2004Q2-2010Q1), the bubble expand quickly, the average arrives at 16.95%. Based on this, the paper concludes that China's national real estate bubble has emerged, and the main incentive is the continual ease of real interest rate, long-standing credit expansion of financial institutions,, broad money supply expansion, and the rapid growth of national economy, especially the fast credit and money supply in recent years supports rising and inflation of Chinese real estate prices and formation and amplification of the real estate bubble.The third question is what relationship exists between credit expansion and the regional real estate bubble. The answer for the question should be analyzed beginning with the measurement of the regional real estate bubble. Using annually data of 12 representative cities in china from 1999 to 2008, this paper establishes panel data models to estimate the regional real estate bubble in china. The results show that the bubble ratio in the regional cities where exists higher real estate prices is usually higher. Overall, the bubble ratio in first-tier cities is highest (14.57%), followed by second-tier cities (7.78%), and finally the third tier cities (4.72%), and bubble level in each tier of the cities appear a trend of gradually enlarging. The panel regression of bubble ratio shows that the raising of interest rate will both enlarge housing price and bubble ratio. Based on it, this paper concludes the interest rate regulation against the fast growth in real estate prices is of great failure. Meanwhile, the overall upward trend and adaptive expectation of the market are the most important reason that there appears significant real estate bubble in China's large and medium cities.Policy recommendations may be illustrated as follows. Firstly, the credit policy must support with land policy, tax policy and fiscal policies, and continuously promote the development of China's real estate financial markets and interest rate reform, preparing for an effective regulation to real estate price in the future. Secondly, special tools of monetary policy, such as special real estate credit regulation should be used to control real estate prices and policy control must co-ordinate real national economic development and domestic livelihood issues. Thirdly, policy control to the real estate bubble in different cities should be time-varying, point-varying and not static. In order to conduct a reasonable guide to the participants of the real estate market, the policy transmission mechanism should be improved.This article, with special emphasis on empirical study, is made on the basis of theoretical analysis and practical study. Firstly, it has made a further analysis on the effects that credit expansion exerts on real estate prices. Secondly, from the perspective of national and regional markets, it has estimated national and regional real estate bubble, based on which, it has also studied the effects that credit expansion exerts on national and regional bubble, and the policy effects that monetary policy (monetary supply, credit support and interest rate) exerts on the buble. It is still rare among the domestic research.