Based On Real Options Theory Of The Real Estate Bubble And The Implications For China

Since 2007,the global financial crises and economic crises broke out,China's real estate market have experienced a hard time.Because of the poor situation both at home and abroad,most of the house prices and the sales in the major cities of China are declining.In the whole year of 2008,the land purchase area decreased by 8.6%, sales area decreased by 19.7%,and the sales revenue declined by 19.5%.Many people and economists are bringing the following issues into focus,such as how China's property market will develop in 2009,how the government will lead and encourage the real estate investment and the consumption,and whether the real estate industry can become the engine of the economy in the process of the recovery.However,only if the property market can develop steadily,can China recover its economy.The most important thing is how to avoid the large fluctuation of the housing prices,and how to avoid the real estate bubbles.In this theme,we study the bubble formation and break-up mechanism from a totally new perspective.And it can help the central government to make the economic recovery plan and the macro-adjustment policies.If you want to research the real estate bubble,you must find the true nature of the housing price,which is connected to the double natures of the real estate.Houses are consuming goods,as well as the investment tools.So they have two kinds of prices, the basic price and the financial price.The supply and demand in the market determine the basic price,but the financial price is influenced by the consumers' expectations.When a person buys a house,he buys a call option,which allows him to sell the house if the price is increasing in the future.But if the housing price is down, he can choose to reside in the house.The option is a kind of derivative products based on the real property,and we call it real option.As a result,in this paper,we find the real option price is a part of the housing price,and the basic house price is steady compared to the fluctuating option price which is affected by many issues.So the whole housing price is changing a lot due to the diversified situations.When the economic outlook is bright,most of the consumers have optimistic anticipations,and they are willing to pay for the high option price.But when the economy is going down,the consumers switch their expectation,as a result the option price is falling,housing price is reducing,and the bubble will break up. The author first studies the reasons of the real estate bubble.And then using the data of the United States' economy and property market from the year of 1970 to 2007,he makes an OLS model and a real option model to find that there was an option price in the price of the American second-used house,and the option price was fluctuating a lot.This is the major reason why America's housing price bubble appeared and broke out.At last,the author uses the model and method to study the China's real estate market,and gives a lot of advice to the real estate macro-adjustment policies.The government should try to increase its efficiency and creditability in order to effectively influence the consumers' expectation and bloom the property market.