House Price Bubbles in China

Transcription

1 House Prce Bubbles n Chna Tng Lan 1, * 1 Deparmen of Fnance and Busness Economcs, Unversy of Macau, Macau, Chna *Correspondence: B1-A308, Block One, Faculy of Busness Admnsraon, Unversy of Macau, Av. Padre Tomas Perera, Tapa, Macau, Chna. Tel: E-mal: Olvalan@umac.mo Receved: November 26, 2013 Acceped: December 17, 2013 Publshed: January 20, 2014 do: /rae.v URL: hp://dx.do.org/ /rae.v Absrac Ths paper uses a vecor of macroeconomc and moneary polcy fundamenal varables o nvesgae he exsence of speculave bubbles on naonal resdenal house marke n Chna over he perod from Mar.1998 o Feb.2013.In he pas few years, excep he quanave easng polcy was mplemened n USA, many moneary polcy nsrumens also have been used on he asse markes n Chna, such as expansonary of moneary supply and lower benchmark neres rae and lendng rae. These led o he hypernflaon happened n Chna and propery prce ncreased dramacally afer Because of he boomng n he real esae ndusry, we are neresed n wheher here s a housng bubble exsng n he marke. Three ses of bubble arbues are examned, ncludng un roo es and co-negraon procedures, we fnd no evdence of raonal bubbles n he naonal housng marke. The ess for duraon dependence n he negave reurns on house prces sugges ha Chna housng marke s no affeced by raonal bubbles. Overall, hs essay proposes moneary polcy and macroeconomc varables are mporan facors for he ncreasng of housng prces. I s also necessary for monearss o consder abou he mpac of neres raes on housng prces. Keywords: moneary polcy; house prces; duraon dependen es; speculave bubbles 86

2 1. Inroducon In 1994, he former Charman of he US Federal Reserve Board, Alan Greenspan alked abou he cenral bank should pay more aenon o asse prce bubbles a he conference on celebrang he 300 h annversary of he foundng of Bank of England. Thus rased he warm dscusson on he relaonshp beween asse prces and moneary polcy around busness cycles and cenral banks from he lae 1990s. Real Esae s one of he mos mporan asses whch are owned by enerprses or resdens. Because real esae has boh consumpon and nvesmen characerscs, real esae prce flucuaons or bubbles can deeply mpac on real economy and fnancal sysem sably and also deeply mpac oher equy prces and fnancal asses. So he real esae prces flucuaons and bubbles burs rased serous challenge o moneary polcy. Recen years he lack of fnancal markes regulaon and nsuon deregulaon have caused he subprme morgage marke bubble n he Uned Saes and spread ou nernaonally whch led o he global fnancal marke crss n year of 2007 and undermne fnancal sably. Addonally, he European soveregn deb crss happened n he lae The number of counres such as Ialy, Greece and Span fell n much quckly n s GDP. The ax revenue declned, he governmen spendng ncreased and real esae bubbles burs, whch caused European counres economy fall no recesson. The nvesors have o reconsder abou he safey of her nvesmen and relocaed her asses away from rsky soveregn debs and eques. Alhough he EU counres used emergency balous and ry o rescue he economy and bankng secors, here s sll no good sgn for economy recovery. Furhermore, a large number of bankrupces of fnancal nsuons caused he capal shorage problems and mposed a negave shock on he real economy n he US and Japan. In order o repay he governmen debs and pull her economes ou of recesson, US governmen s forced o use loose moneary polcy, reduce he raes and prn more money. Ths opon have furher weaker he world economy and caused cross border nflaon rsng rsk. In he lae 1970s, Chna governmen had mplemened a complee welfare-housng sysem. The consruced welfare housng s under he governmen admnsrave conrol. The low lendng and dsrbung houses o czens are based on governmen annual housng plan. Therefore, here s no real esae marke exsed ll year In July 1998, cenral governmen announced he noce on he deepenng of housng reform and fasens housng consrucon polcy. Whch spulaed he welfare-housng dsrbuon sysem was abolshed; all ces mplemened he polcy of house monezaon allocaon and resdens need o buy commercal aparmens n he resdenal propery radng marke. Ths symbolzed ha real esae marke began o funcon as an nvsble hands o solve resdence problems. Afer weny years fas growng perod, Chna s economy has been growng rapdly. Gven s sable polcal envronmen, rapd ncreasng of growh domesc producs, low producon cos, large consumer marke, greaer poenal n demand and mproved moneary polcy sysem by cenral governmen, Chna has led o a rse n he annual average dsposal ncome of all resdens. Ths has n urn led o an ncrease of consumpon. And evenually benefs he Chna real esae marke. 87

3 Alhough he global fnancal crss and subsequen downurn happened n auumn 2008 ha brough emporary damage o he real esae marke and sock marke n Chna, cenral governmen announced a four rllon RMB (586 Bllon US Dollars) smulus package o encourage he economy on a sable ncrease on Nov.9 h 2008 and use loose moneary polcy o encourage producon and consumpon. The capal njecon was manly spen on housng, rural nfrasrucure, waer, elecrcy, ransporaon, he envronmen, echnologcal nnovaon, ax cus and he commercal banks cred celng as well n 10 major areas durng he las wo years. The cenral governmen allows more lendng o develop housng, roads and brdges. Ths has drven employmen n areas of manufacurng, seel, cemen and oher secors of he economy. Banks also acceleraed he developmen of cred guaranee servces, and one hrd of he oal lendng acves have been accouned as he home morgage loans. The Bank of Chna cu he base lendng rae and depos-reserve rae four mes from Sepember 16 h o December 23 rd, So whn hree monhs, one year base lendng rae and depos-reserve rae have been fallen 2.16 bass pons and 4 bass pons. Therefore, comparng wh wesern developed counres sufferng serous economy recesson, he decrease n he base lendng rae and depos-reserve rae, he loosenng of conrols on morgage loan for busness and household and expansonary money supply have no doub led Chna o face he ncreasng of ambous GDP arge and follows by he quckly recovery of real esae markes. A he same me, he excess lqudy caused hgh nflaon and more money flows no real esae marke. There have oher facors ha may have led o rsng housng prces. Anoher possble conrbuor ncludes he adopon of quanave easng polcy by he Uned Saes Federal Reserve Bank snce early The Fed s wo major quanave easng programs are buyng reasury noes and bonds. On Mar.19 h, 2009, bough $300 bllon of reasury coupons secures and s referred o as QE1. And on Nov.3 rd, 2010, bough anoher $600 bllon no he sll lmpng US economy and s referred o as QE2. Laer on, he US Federal Reserve on Sep.14 h, 2012 announced he hrd round of quanave easng (QE3) ha enals purchasng $40 bllon each monh ll he US employmen marke show recovery sgn. The quanave easng polcy may help he US economy n a few ways. Frsly, can reduce lendng cos, as a lower neres rae smulaes nvesmen n he economy. Secondly, he excessve ssuance of US dollar wll nevably lead o a deprecaon of he currency and push up global commody prces. Neverheless, he Quanave Easng polcy s lkely o hur he Chnese economy n several serous ways. I would devaluae dollar relave o he RMB and makes RMB apprecaes. Mos mporanly, Chna s nflaon and ho money are rsng, hereby exacerbang asse bubbles. The ncreasng house prces lead cenral governmen concern and publshed numbers of resrced moneary regulaons o sable. In 2011, cenral bank rased he depos-reserve rae sx mes whn sx monhs (Jan 20 h, Feb 24 h, Mar 25 h, Apr.17 h, May 18 h and June 16 h ), up 0.5% each me. The rae clmbed o 21.5%. Moreover, cenral bank also rased he base lendng rae o 6.56% and base neres rae o 3.50% n July These nsrumens are showng he polcymakers srong wllng o ghen moneary polcy, reduce he serous nflaon and evenually adjus he house prce level back o normal. 88

4 From Fgure 1 Chna overall resdenal r sellng prces, n year he naonal housng prce reached o a peak. Even facng he globall fnancal crss, he house prces jus dppedd slghly n 2008 bu hen showed sgns of recovery afer ha. Because he srong demand from young adul, under he acve fscal polcy and loose moneary polcy suppor, has shown ha he real esae prces rose dramacally n year 2009, even hgherr han ha n year Year 2011 has been consdered as he larges house prces ncreasngg year durngg las 13 years. The house prce per square meer clmbed upp o 6140 RMB, comparng wh 1933 RMB n year 1998, he house prce has ncreased 218% n year Alhough n year 2012, he cenral governmen mplemened many new regulaons and polces,, such as reducng bank loan, prohb ndvduals o speculae exra new dwellngs. The sales volume seems arophy, bu he resdenal house prce remans srong and reaches o 6639 RMB per square meer n Feb Accordng o he Chna Real Esae Index Sysem (CREIS) repor CREIS Hundred Ces Prce Index ha was publshed on June.3 rd, 2013, he overall resdenal housng prce of Chna One Hundred represenavee ces s 7066 RMB per square meer n May. 2013, he prce ndex sgnal sll shows he ncreasng rend. Fgure 1. The Trend of Resdenal Housng Prce (RMB per square meer) Snce Chna s one of he world s larges counres, real esaee ndusry ss he foundaon of he naonal economy and gudng secor, bu also pllar ndusry. In Chna, he proporon of added value of real esae ndusry o GDP has ncreased year by b year; he resdenal housng nvesmen as a share of Chna s GDP has rpled from 2% n 2000 o 6% n Nowadays, he real esae ndusry s closely relaed o he naonal economy, whch s he baromeer of he naonal economy. From , Chna s average house prce ncreased by 225%, house prces have been ncreasng a hgh raes especally over recen years (Wu, Gyourko and Deng, 2010).Under hs background d, we may wonder wheher here are bubbless exsed n Chna s resdenal housng marke. We also need o do deepp research onn he mpac of real esae prce on every sde of he monearyy polcy framework byy usng foregn research papers and combng wh Chna s realy. 89

5 Unl now, here s no accurae defnon of real esae bubble and he The New Palgrave: A dconary of Economcs (1987) defned a bubble hs way: a sharp rse n prce of an asse or a range of asses n a connuous process, wh he nal rse generang expecaons of furher rses and aracng new buyers generally speculaors neresed n profs from radng raher han n s use or earnng capacy. The rse s hen followed by a reversal of expecaons and a sharp declne n prce, ofen resulng n severe fnancal crss n shor, he bubble burss. Through he defnon we can see ha he measure of real esae bubble namely means he deparure of prces form fundamenal value. (Garber 1990) proposed ha he asses raded a her fundamenal values by sudyng of hree famous bubble epsodes, hey are he Duch ulp mana ( ), he Msssspp Bubble ( ) and he Souh Sea Bubble (1720). He red o fnd he reasonable economc explanaons by ncludng he percepon of an ncreased probably of large reurns. The percepon can be rgged by many hngs, such as economc news, or unrealsc expecaon of fuure prce ncreases (Case and Shller, 2003). 2. Conrbuon and Benefs of he Sudy Ths paper examnes f raonal speculave bubbles occurred n Chna s resdenal housng marke. We defne bubbles as he devaon of real house prces from s marke fundamenals. Unlke prevous sudes, hs paper assesses he relaonshp among house prces and wo knds of varables,.e. macro-economc varables and moneary varables. By usng he ARCH model, we fnd ha boh economc and moneary varables affec changes of resdenal housng prces. By usng drec and ndrec ess, we fnd ha here s no sgnfcan housng prce bubbles exs n naonal housng marke n Chna. Our fndng wll help he Chnese governmen adop approprae polcy or mplemen necessary regulaons o conrol he abnormal run-up of house prces. The remander of hs sudy s organzed as follows: Secon 3 s he leraure revew of prevous sudes on moneary polcy and real esae prces n dfferen counres. Secon 4 descrbes he daa used and hypohess appled n hs paper. Secon 5 descrbes fnancal models o be used n he paper. Secon 6 descrbes he ndrec and drec ess bubble mehods. A he end of hs paper secon 7, we make conclusons and pu forward some suggesons on he coordnaed developmen of he real esae markes and Chna economy. 3. Leraure Revew on Housng Prces and Fundamenal Varables There s a large par of exan leraure examnng he neracon beween house prces and naonal economy. Mller and Peng (2007, 2009) provded he relaonshp beween house prces and naonal wealh effec, and show he resul for ha here s a posve relaonshp beween hem. The naonal economy growh has a sgnfcan effec on he house prces. Cosello,G.,Fraser, P.,& Groenewold, N.(2011) used presen value model and found ou here s devaons of acual prce from s esmaed fundamenal prces spllover from ces over Ausrala. 90

6 There are sll much of he house prce leraure revews marke fundamenals derve from demand and supply funcon, whch conans economc varables such as populaon, unemploymen rae, sock of vacan new dwellngs, ec. And house prces can be sgnfcanly nfluenced by hese facors. Edde & Shen (2006) measured he relaonshp beween house prces and marke fundamenals n hree ces; hey are Bejng, Shangha and HK. They found here are dfferences beween house prces and marke fundamenals n HK and Shangha, and confrmed here are bubbles exsed n hese wo ces n year As ndcaed by he above summary of he fundamenal house prce leraure, he focus has ypcally been on varous measures of fundamenals. The mpac beween house prces and moneary polcy s anoher mporan ssue. Accordng he bes knowledge of he auhor, unforunaely, he emprcal leraure n Chna on hs subjec s scarce. And we are he frs o examne f here s a speculave bubble n naonal resdenal housng marke. In wesern counres, especally where he real esae marke s relavely maured counry, boh academc and cenral bank have broadly pay aenon o how he asse prces are nfluenced by moneary polcy. (Mshkn 2001, 2007; Iacovello 2005; Taylor 2007, 2008, 2009) especally suded he relaonshp beween housng prces and moneary polcy n USA, and hey go he resuls ha moneary polcy can sgnfcan effec on house prces. Mshkn (2001) suded he relaonshp among moneary ransmsson mechansm and sock prces, real esae prces and foregn exchange raes. Excep sock marke prce, he real esae prce plays an mporan role n he moneary ransmsson mechansm oo. The expansonary of moneary polcy reduces neres rae, furher reduces he cos of fnancng housng and herefore ncreases he house prce. Mshkn (2007) used he concep of user cos of capal, when here s an neres rae ncreased he user cos of capal, wll cause a declne n housng demand and prces. As a resul, he large run-ups n house prce can serously affec he fnancal nsably, and moneary polcy makers should respond o he flucuaon of real esae prce. There s emprcal evdence on he lnk from moneary polcy o resdenal prces. Usng he srucure VAR mehodology, Iacovello (2005) found ha he mpac of moneary polcy on real esae prces durng 1974Q1 o 2003Q2. The auhor denfy he moneary polcy has sgnfcan effec on house prce hrough mpulse response model. Gulodor (2005) provded some quanave and qualave evdence of he house prce and moneary ransmsson mechansm across nne European counres. The paper presens he response of house prces o neres raes and he consumpon as well. Usng a number of VAR models, he auhor found ou he counres wh more advanage of morgage markes and effcen housng sysem, he relaonshp beween neres rae and house prces wll be sronger. Ahearne, Ammer, Doyle, Kole and Marn (2005) suded house prces n 18 advanced economes and also ge resuls ha confrm he lnk from moneary polcy o housng prces. Taylor (2007) also provded an early example of a sudy ascrbng a large role o oo loose moneary polcy n USA, whch means oo low neres rae, rraes housng acvy afer he 2001 recesson. Taylor (2008, 2009) ncreased suggesng ha loose moneary polcy s a prmary cause of he bubble n house prces and acvy. In he wde selecon of emprcal papers, he majory researchers conclude he loose moneary polcy was a prmary cause of he bubble n house prces of wesern counres. 91

7 Comparng large amoun of research papers abou wesern counres moneary polcy effecs on house prces, sudes on he moneary ransmsson mechansm n emergng economes, especally Chna s very lmed. Kovu (2010) suded he wealh effec n Chna, usng he VAR model, he loose moneary polcy n Chna acually leads o hgher asse prces, especally house prces. Yao, Luo& Loh (2011) used monhly daa from June 2005-Sepember 2010 n Chna o nvesgae he long-run relaonshp beween moneary polcy and asse prces. Usng he VAR model, he emprcal resuls showed ha moneary polcy has lle effec on resdenal prces, cenral bank and governmen should no only use neres rae o manan he fnancal sably. They also need o consder many cenral plannng polces when dealng wh asse bubbles. All of he above menoned papers suded only a par of he facors whch effec house prces. Eher hey look a he relaonshp beween macroeconomc fundamenal varables and house prces or hey esmae he mpac from moneary polcy o house prces. They do no nvesgae he long-run relaonshp among he naonal economy, house prces and moneary polcy. Also alhough here are a few sudes dealng wh moneary polces and asse prces n Chna, none of hem use hese key varables o drecly and ndrecly es and explan f here are raonal speculave bubbles n Chna overall resdenal housng marke. To sum up, researchers use heorecal and emprcal models o show he conflcng resuls and mplcaon abou he moneary polcy nsrumen on house prce and relaonshp beween house prce bubble and marke fundamenal. All of hem ddn show he clear relaonshp beween he growh economy and moneary polcy nsrumens, whch can sgnfcanly affec roarng house prces n Chna. Ths paper ams o fll n hs leraure gap. Asse prces especally house prces occupy an mporan role n naonal economy. The oal fxed asse managemen has accouned for nearly 50% of Chna s Growh Domesc Produc. Therefore, nvesgang he lnk from macroeconomc varables, moneary polcy nsrumen on house prces, and examnng he bubbles and denfyng he level of speculave bubbles may provde nvesors as well as polcy makers a beer undersandng of he volaly and flucuaon of he Chna resdenal housng marke. 4. Daa and Hypohess Our monhly daa source comes from he CEIC Daa Ld, a daa provder whose daa are from offcal sources (monhly daa deals n Appendx A). The research perod runs o he Feb.2013 bu s resrcve n sarng on March 1998 due o he avalably of daa. The relaonshp beween real esae prces and busness cycles has been suded by many researchers. Qugley (1999), Edde and Shen (2006) and Deng, Ma &Chang (2009) used aggregae demand and supply model, he sae varables ncluded n her equlbrum models are sock marke reurns, real GDP, dsposable ncome, unemploymen, nflaon rae, money supply, and neres raes, ec.. However, he numbers of sudy abou macroeconomc and moneary polcy rsk nfluences on he real esae marke n Chna s relavely lmed compared o he USA. 92

8 The varables ncluded n hs sudy are hypoheszed o ac as a se of laen varables whch deermned reurn on resdenal housng prces n Chna. I s mporan o know ha hs se of varables doesn capure all rsk facors, bu hey ndcae he mos mporan varables ha affec reurn on overall resdenal housng prces n Chna. In our sudy, he reurns on resdenal housng prces n Chna are expeced o relae wh he followng varables: resdenal housng marke nvesmen (Invesmen), nflaon rae (Inflaon), lendng rae and lagged one perod of reurn on housng prces. 4.1 Resdenal Housng Marke Invesmen (Invesmen) There s evdence ha ncreasng of nvesmen wll ceranly resul n housng prces decrease. Snce hgher nvesmen may lead o weak housng sales, more rsng nvenores of house for sale, and fallng housng prces, hese n urn wll make buldng houses less profable. And so bulders and developers are lkely o consruc fewer new houses and creang an overall reducon n reurns on house prces. Therefore, we can assumpon he growh n nvesmen has predcve power and has a negave nfluence o reurns on resdenal housng prce n Chna. 4.2 Inflaon Rae (Inflaon) Inflaon rae nfluences are very mporan n Chna resdenal housng marke. In Chna, he nflaon rae s he relave of he CPI for all urban consumers. Ths measures he real prces of several housand goods and servces. The ncreasng of nflaon rae wll show he ncreasng prces rend of all he goods or servces purchased by households. Therefore, here s a posve relaonshp wh respec o he change n nflaon rae rsk on resdenal housng marke. 4.3 Lendng Rae Ths moneary polcy ndcaor s seleced because has sgnfcan effec on boh he real esae company and he consumers n he marke. In general, he nomnal neres raes and lendng raes n Chna are conrolled by he PBOC (People s Bank of Chna). Mos household buyers are borrowng money hrough commercal banks. Hgher neres rae can reduce he nvesmen acves for boh real esae developers and nvesors. Therefore, lendng rae s expeced o have negave affec reurn on resdenal housng marke. So far, several emprcal sudes have already found ou ha neres rae helps o explan a sgnfcan proporon of he varably n excess reurns on propery. (Lng and Naranjo, 1997); Low,K.H.and Huang, Q (2006). The real lendng rae s normally calculaed from nomnal lendng rae mnus he nflaon rae, esmaed from CPI. In hs paper, we use bank fve-year prme lendng rae. Table 1 presens he descrpve sascs of he reurns on resdenal housng prces n Chna and he selecon of he varables for he enre sample perod from Mar.1998 o Feb They nclude he mean, sandard devaon, maxmum and mnmum, he measures for skewness, kuross and Ljung-Box auocorrelaon es for all he varables. As can be seen from he Panel A of Table 1, he posve skewness of reurn on housng prce s around Excess kuross of greaer han 3 s found ; s lepokurc wh greaer posve 93

9 kuross n reurns dsrbuons ndcaes ncreased rsk. From he prelmnary analyss, ndcaes he poenal for raonal speculave bubbles. However, hese dagnosc ess are sll nconclusve, snce he fundamenal values can also be assocaed wh hese arbues. In nex secon, we wll presen he resuls of more formal bubbles ess. Panel B of Table 1 also repors Ljung-Box sascs ess for he reurns on housng prces and all he varables. The auocorrelaon denoes Q (6) and Q (12) are sascally sgnfcan a he 1% level. Q (12) ess welve monhs of lag operaons. The varables show posve auocorrelaon, he null hypohess of no auocorrelaon s rejeced a lag 6 and lag 12 for all varables. Table 1. Descrpve Sascs of Reurn and Varables, Varables Perod N Mean Sandard Devaon Panel A: Descrpve Sascs Reurn on HP 1998: : Invesmen 1998: : Inflaon 1998: : Lendng Rae 1998: : Panel B: Auocorrelaon of he varables P(1) P(2) P(3) P(4) Reurn on HP Invesmen Inflaon Lendng Rae Varables Mn Max Skewness Kuross Panel A: Descrpve Sascs Reurn on HP Invesmen Inflaon Lendng Rae Panel B: Auocorrelaon of he varables P(5) P(6) Q(6) Q(12) Reurn on HP *** *** Invesmen *** *** Inflaon *** *** Lendng Rae *** *** Noes: Reurn on HP=monhly reurns on housng marke; Invesmen=resdenal housng marke nvesmen; Inflaon=monhly nflaon rae; lendng rae=fve year bankng lendng rae, Q(6) and Q(12) are he Ljung-Box(1978) pormaneau es sascs for 6 and 12 auocorrelaons. ***ndcaes sgnfcance a he 1% level. 94

10 5. Fnancal Models: Rsk and Reurn 5.1 Arbrage Prcng Model In he secon, we frs examne he mpac of sysemac rsks on he excess reurn of he resdenal housng prces n Chna. The CAPM provdes a framework relang dosyncrac and sysemac marke rsks wh excess reurns of asses. An alernave approach o model he relaonshp beween rsk and reurns of fnancal asses s o explan he reurns of an asse by macroeconomc varables, moneary polcy varables or changng busness condons. The approach of modelng he expeced reurn of a fnancal asse as a lnear funcon of varous macro-economc facors was nally suggesed by Ross (1976) and s generally known as APT. Same as CAPM, n APT he sensvy of he reurns o changes n each rsk facor s represened by a facor specfc β coeffcen, however, APT allows for n dfferen facors. The reurn of an nvesmen can be deermned accordng o he followng equaon: R n = + ( j= 1 α β F ) + ε j j Where R denoes he excess reurn on he asse, α denoes some consan erm, denoes he sensvy coeffcen of asse reurn o rsk facor F j.and ε denoes he dosyncrac or error erm, ha canno be explaned by rsk facor. Snce he explanaon of he CAPM usng only a sngle marke facor maybe lmed for real esae reurns, we wll use he expandng macroeconomc and moneary polcy varables n APT o nvesgae he excess reurns on resdenal housng prces n Chna. Many oversea heorecal and emprcal works (MaCue and Klng, 1994; Lng and Naranjo, 1997; Karoly and Sanders, 1998; and Low, K.H., Ibrahm, M.F., and Huang, Q., 2006) had already focused he lnk beween propery (or real esae) reurns and macroeconomc varables. Chen e al (1986) and Chen (1991) have documened a srong relaonshp beween he US sock reurns and real economc varables such as real GDP, ndusral producon, nflaon, and neres raes, ec. Chen (1991) menoned ha s mporan o choose he macroeconomc and moneary varables n a way conssen wh her forecass of asse reurns. As menoned earler, we choose resdenal housng marke nvesmen (Invesmen), nflaon rae (nflaon), lendng rae and lagged one perod of reurn on housng prces varables. 5.2 ARCH Model A fnancal model such as ARCH s able o capure volaly cluserng and predc he condonal varance. Accordng o Engle (1982), he frs dfference of fnancal me seres ofen exhb wde volaly, whch means he varance of fnancal me seres vares over me. The ARCH model can adequaely f mos fnancal me seres daa. The model s exended n hs paper o nclude addonal explanaory varables n he mean equaon. The ARCH (1) model used for esmaon s as follows: β j 95

11 R n = β 0 + β R + β 2DInves + β3dinf + β 4LR + ε 1 = 1 (1) ε 2 = α0 + α1ε 1 (2) In hs model, R s he excess reurn on he housng marke, s he auoregressve lag of excess reurns n he mean equaon, ε s he resdual erm, and he parameers are,, β,,,, α. In he mean equaon, he opmal lag srucure s deermned o be 1 (n=1) for β3 β4 α 0 1 he excess reurns n order o elmnae he auocorrelaon for he resdual erm. To ensure he varance s well defned, he parameers andα mus be posve. 5.3 Inerpreaon of he Resuls ε α 0 1 Accordng o he oupu resul, we can wre down he ARCH (1) model esmae resuls as follow. Resuls show several fndngs and mplcaons. The expeced excess reurns on housng marke n Chna are posvely correlaed wh lagged one perod of reurn on housng prces varables, change n nflaon rae, and negavely correlaed wh he lendng rae. The R β0 β1 2 ARCH parameer α 1 s sgnfcan posve a Wh adjused R square equals , we also es he sgnfcance of any ndvdual β coeffcen by he es and he resuls show ha all he coeffcens are sgnfcan. The resul shows ha ARCH (1) model s que capable of explanng varaons n excess reurns on Chna resdenal housng marke. R = DInves DINF 0. 42LR + ε R 1 (0.06) (0.02) (0.01) (0.02) (0.02) ε ε 2 = Drec and Indrec Bubbles Tess 6.1 Un Roo Tes Analyss and Resuls Dba and Grossman (1988) ndcaed ha a raonal bubble mus have always exsed from he frs day of radng. Usng Dckey-Fuller ess, Dba and Grossman fnd ha boh dvdends and sock prces are saonary n dfference. The resuls show he non-saonary n he level s caused by marke fundamenals, no by speculave bubbles. We use Augmened Dkey Fuller (ADF) (1979) and Phllps Perron (PP) (1987) un roo ess o measure he saonary of he prce of resdenal housng and he fundamenal varables. Then we can use conegraon analyss o es for raonal speculave bubbles. Accordng o Dba and 96

12 Grossman (1988), f here s long-erm relaonshp exsed beween prces and fundamenals; we wll have evdence agans he presence of a bubble. In order o check he saonary of house prces and fundamenal varables, we apply he ADF and PP un roo ess n hs paper. The ess n here conss of esmang he followng regresson. For ADF es: ΔY = β + β + δy + α ΔY + ε m = 1 (3) Where ΔY = ( Y Y ) 1.If δ =0, hen he Y seres has a un roo. Whch means he 1 1 seres s non-saonary. For PP es: Y = 1 + β2y 1 β + ε (4) If β 2 =1, hen he Y seres has a un roo. In able 2, panel A and B repor he house prce and macroeconomc and moneary varables un roo es resuls for he perod durng Mar.1998-Feb The repor shows he nercep and rend or whou. Boh resuls show ha all he varables are non-saonary a he levels of me seres, bu hey are saonary afer he frs dfference I (1). The null hypohess of a un roo canno be rejeced when he varables are measured a he level, bu s rejeced a her frs dfferences. Based on he un roo ess, able 2 shows no evdence of resdenal prcng bubbles durng Mar.1998-Feb.2013.Because s clear o see ha all varables are saonary a her frs dfference raher han level, s possble o esablsh a long-run relaonshp beween prce and fundamenals, s evdence agans he presence of a bubble. Table 2. ADF and PP Un Roo Tess of Varables, Mar.1998-Feb.2013 Varables ADF PP No Trend Trend No Trend Trend Panel A: House Prce and Varables a level LnHP ** LnInvesmen Inflaon Lendng Rae Panel B: Change n House Prce and Varables DLnHP -3.14** -3.31** *** *** DInvesmen -3.05** -3.27** *** *** DInflaon -5.70*** -5.70*** *** *** DLendng Rae *** *** *** *** 97

13 Noes: Three macroeconomc and moneary polcy varables used as a proxy for fundamenal facors are gross domesc produc, nflaon rae, and real lendng raes. Correspondng crcal values for model wh only nercep for ADF and PP un roo ess are -3.47, -2.88, and for 1, 5, and 10 percen sgnfcan level, respecvely. Correspondng crcal values for model wh nercep and rend for ADF and PP un roo ess are -4.02, and for 1, 5, and 10 percen sgnfcan level, respecvely. ***, **, and * ndcae sgnfcan a he 1%, 5%, and 10% levels. 6.2 Co-negraon Tes Analyss and Resuls We use he Johansen and Juselus (1990) es o esmae he number of co-negraon or long-run relaonshp beween he resdenal house prces and he fundamenal varables. If hey are co-negraed, here s no bubble exss (Dba and Grossman, 1988). The es s based on he followng vecor auoregresson (VAR) model: Y = AY A2Y ApY p + ε, =1,2,,n (5) Where Y s a vecor of non-saonary varables, Y =(LnHP, LnInvesmen, Inflaon, Lendng rae). A p s K*K marx conans nformaon abou he relaonshps among hese varables. Johansen and Juselus (1990) provde maxmum egenvalue es and race es o examne he number of conegrang vecors among hese varables. The null hypohess of maxmum egenvalue es s ha here are a mos r conegrang vecors. The null hypohess of race es s ha he number of conegrang vecors s less han or equal o r. When applyng conegrang es, all he varables n he VAR model should be non-saonary. From he able 2 of un roo es resuls, we can see ha all varables are havng un roos a her levels. Table 3 repors he JJ co-negraon rank es resuls. The λ race and λmax based on 12 lags for he enre perod. Evdence shows ha here are more han one conegrang relaonshp for resdenal housng prces and macroeconomc and moneary varables. Snce boh λ and λ sascs ess rejec he null hypohess of r 1 race max accordng o r=2 a he 5% and 1% sgnfcance level. Therefore, he null hypohess of no negraon can be rejeced by boh he race and max-egenvalue sascs a he 5% and 1% sgnfcan level. The resuls show he resdenal housng prces and fundamenal varables are co-negraed over he enre perod. Tha mples here s long run relaonshp among house prces and fundamenal varables. Thus, we can conclude ha he presence of speculave bubbles can be rejeced. 98

14 Table 3. Johansen Tes Resuls for Lnear Co-Inegraon among Varables Research n Appled Economcs Sudy Perod Trace Trace Sascs Max Max Sascs H 0 Sascs Crcal Value Egenvalue Crcal Value CV5% CV1% CV5% CV1% r= * 71.48** * 37.49** r * 49.36** * 30.83** r * Noes: Twelve lag were used n all conegraon vecors based on Akake s Informaon Crera. H 0 s he null hypohess ha here exss a mos r conegraon vecors n he sysem. The conegraon ess are esmaed under he assumpon of rend n daa and an nercep and rend n he conegrang equaon. CV (5%) and CV (1%) are he crcal values of he race sascs and maxmum Egenvalue sascs for conegraon ess. **ndcaes sgnfcance a he 1% level and * ndcaes sgnfcance a he 5% level. 6.3 Duraon Dependence Tes Analyss and Resuls Duraon dependence es s a new esable mplcaon for bubbles, whch s developed by McQueen and Thorley (1994) he duraon dependence es suggess ha he probably ha a run of posve abnormal reurns wll end should declne wh he lengh of he run.(negave hazard funcon). Ths es s more flexble and has no requremen of he denfcaon of specfc fundamenal facors and also doesn requre ha he me seres have o be normally dsrbued. (Abdul-Haque, Wang and Oyand, 2008; Jrasakuldech, Emeker and Rao, 2007). Duraon dependence es has been wdely appled and suppored o nvesgae he presence of raonal speculave bubbles n varous academc felds, such as real esae marke (Jrasakuldech, Campbell and Kngh, 2006), and equy marke (McQueen and Thorley, 1994). In our research paper, he es performed on Log-logsc model. And he runs are creaed usng nomnal housng prces reurns. To apply he duraon dependence ess, hs sudy follows he mehod as adoped by Blanchard and Wason (1982), Evan (1986) and McQueen and Thorley (1994), n whch reurns are frs requred o ransform no seres of run lenghs of wo daa ses, whch are posve and negave observed reurns for monhly daa. A run s defned as a sequence of reurns of he same sgns. The sample hazard raes of runs of posve and negave reurns are esmaed based on he formula. h = N /( M + N) (6) 99

15 Where N s he coun of runs of lengh and M s he coun of runs wh a lengh greaer han. Under he null hypohess of no bubble or no duraon dependence, we should observe a consan hazard rae, whch mples ha he abnormal reurns exhb a random walk n Chna resdenal housng marke. On he oher hand, a decreasng hazard rae suggess he presence of raonal speculave bubbles or duraon dependence. A dscree hazard model for duraon s consruced for hs sudy followng McQueen and Thorley (1994) mehod, and he log-lkelhood funcon for a sequence of N runs s expressed as follows: L( θ / S To perform a es of duraon dependence, a funcon form mus be chosen from he hazard funcon for h. Ths sudy employs duraon dependence es usng he Log- logsc model for he deecon of raonal speculave bubbles. The model wll be used n order o ensure ha he resuls are no sensve o he underlyng assumpons of a parcular es and ha hey are no based. The sample hazard rae for each lengh, can be esmaed from maxmzng he log lkelhood funcon of he hazard funcon. The Log-logsc funcon s defned as: T ) N = Σ = 1 [ N Lnh + M Ln(1 h )] (7) h = 1/1+ e ( α + βln) (8) Where β s he esmaed coeffcen of run lengh, hs funcon ransforms he unbounded range of α + β Ln () no a (0, 1) space of h, he condonal probably of endng a run. The duraon dependence es for logsc hazard funcon s performed by subsung Equaon (6) no (5) and maxmzng he log lkelhood funcon wh respec o α and β. Generally, an esmae of β ha s negave and sgnfcanly dfferen han zero for posve runs, n conjuncon wh an nsgnfcan esmae of β for negave runs, s consdered evdence of speculave bubbles. (McQueen and Thorley, 1994) Table 4 repors he duraon dependence es wh he log logsc model for runs of monhly abnormal reurns for he full sample perod (Mar.1998-Feb.2013). The posve and negave run couns are lsed a each horzon. 100

16 Table 4. Duraon Dependence Tes Resuls for Monhly Reurns Run Lengh Posve Runs Negave Runs Acual Run Couns Toal=45 Sample Hazard Raes Acual Run Couns Toal=43 Sample Hazard Raes Log-Logsc Tes α β LRT of H0:β=0 (p-value) (0.64) (0.95) Noes: 1. A run of lengh s a sequence of reurns of he same sgn. 2. Posve and negave reurns are defned relave o he housng reurns erm 3. The sample hazard rae represens he condonal probably ha a run ends a, gven ha lass unl, 4. The log-logsc funcon s. β s he hazard rae whch s esmaed usng he logscs regresson where ndependen varable s he log of curren lengh of he run and dependen varable s 1 f he run ends and 0 f does no end n he nex perod. 5. The LRT (lkelhood rao es) of he null hypohess, H1: β = 0, of no duraon dependence (Consan hazard rae) follows he χ² (1) dsrbuon. 6. P-value s he margnal sgnfcance level, whch s he probably of obanng ha value of he LRT or hgher under he null hypohess. The sample hazard rae esmaes he probably ha a run ends a, whch means lass unl. For example, he hazard rae assocaed wh a posve run lengh of 5 monh s 0.5. Ths means ha f a posve run persss for fve consecuve monhs, here s 50% 101

17 probably ha he bubble wll burs n he nex monh. The maxmum lkelhood esmaes of he log-logsc funcon parameers α and β are repored as well. As shown n able 4, he runs of posve reurns exhb negave β coeffcen (β=-0.448), he confdence nerval (p-value) are based on LRT, whch s he probably of obanng he value of LRT or hgher under he null hypohess of no bubble (β=0). The resul of he lkelhood rao es (LRT) of β s nsgnfcan (P value; 0.64).As a resul, durng he full sample perod wh he monhly daa, no bubble hypohess wll no be rejeced. The negave reurns exhb negave β coeffcen (β=-0.04), bu he resuls s no sgnfcan snce he P value s 0.95, whch s also nconssen wh he raonal bubbles. In summary, durng he full sample perod, he resuls for boh posve and negave runs do no suppor he evdence of he exsence of raonal speculave bubbles n Chna resdenal housng marke wh he log-logsc models wh monhly housng prces reurns. 7. Summary and Conclusons Ths paper ams o ncrease our undersandng of he relaonshp among naonal economy, resdenal housng prces and moneary polcy n Chna. In parcular, we have red o answer he queson wheher he fundamenal varables nfluence housng prces. The deecon of raonal speculave bubbles n he housng marke s also explored. Some lmaon of he research should be noced before we hghlgh our key fndngs. Frs, here are some lmaons for daa collecons. The naonal daa can only be gven from year 1998, snce here was no real prvae marke neher n housng un or land marke ll Therefore, we can only compare curren condons wh lle more han a decade of daa. In fac, he daa abou naonal average resdenal sellng prces are all colleced from a boomng perod. Second, he macroeconomc and moneary polcy varables used n he model specfed n hs sudy are paral macroeconomc and moneary polcy sysem, he research ddn perm a full nvesgaon of oher ndrec nfluences on he house prces; Thrd, he regonal areas bubbles, such as Bejng, Shangha, Guangzhou ndvdual ces bubbles should be examned as well. Fnally, he assumpon and specfcaon are necessary for emprcal purposes and here has space for fuure research o address hese shorcomngs. Our fndng ndcaes here s a long-run relaonshp beween overall resdenal housng prces and s mporan fundamenals. However, he real lendng rae has a relave weakly effec on he house prces. Ths can be undersood ha Chna s facng very hgh nflaon n he hsory; comparng wh he low lendng and neres raes, he hgher reurn from nvesng n real esae marke aracs Chnese nvesors end o ake excessve rsk and expec he housng prces wll ncrease more. Ths knd of hedgng nvesmen behavor can be explaned by varous Chna s unque socal and culure facors. Chna s facng rapd urbanzaons, boomng naonal economy, marryng aude oward household ownershp, and lack of nvesmen channel, all hese facors ogeher wh mmaure real esae marke compeon make he key facors responsble for ncreasng of Chna resdenal housng prces. 102

18 From he resuls found n hs paper and pleny of evdence boh shown n he economerc analyss resuls and daa facors, Chna overall resdenal housng marke s facng connung ncreasng of house prces, bu here s sll no occur speculave raonal bubbles. The polcal developmen n Chna has a sgnfcan mpac on marke volaly and reurns, he unexpeced reurns jump or drop n he housng marke are assocaed wh he polcal news. The resuls of hs sudy provde several mplcaons o polcymakers on he effcency of he Chna resdenal housng marke so he polcymakers would provde gudance o he nvesors o ac raonally by adjusng he housng prces n he fuure. In order o conrol he abnormal ncreasng of resdenal housng prces, he bes polcy framework o acheve prce and fnancal sably s o manan flexble nflaon. Thus, hs arge nduces polcy makers o adjus neres rae o offse ncpen nflaonary or deflaonary pressure. To avod he bubbles occurrng, he polcy makers can consder rasng he neres rae as housng prces rase and reducng he neres rae when housng prces fall. In addon, enhancng he ransparency of he housng marke would make he nformaon easly accessble o nvesors ha are able o reduce nformaon asymmery o preven bubbles. Fnally, he developmen of fnancal nfrasrucure such as he propery ax paymen sysems and he consrucng dervave producs whch can make nvesors hedge her rsk wll evenually conrol he abnormal ncreasng of housng prces. References Abdul-Haque, Wang, S., & Oyang, H. (2008). Raonal speculave bubbles n Chnese sock marke. Inernaonal Journal of Appled Economcs, 5(1), Ahearne, A. G., Ammer, J., Doyle, B. D., Kole, L. S., & Marn, R. F. H. (2005). House Prces and Moneary Polcy: A Cross-Counry Sudy. Board of Governors of he Federal Reserve Sysem. Inernaonal Fnance Dscusson Papers, No Blanchard OJ, & Wason MW (1982). Bubbles, raonal expecaons, and fnancal markes. In:Wachel P (ed) Crss n he economc and fnancal sysem. Lexnon Books, Lexnon,Massachuses Case, Karl E., & Rober J. Shller. (2003). Is There a Bubble n he Housng Marke? Brookngs Papers on Economc Acvy (Brookngs Insuon), 2, Chen, N.F. (1991). Fnancal nvesmen opporunes and macroeconomy. Journal of Fnance, 46, Chen, N.F., Roll, R., & Ross, S. (1986). Economc forces and he sock markes. Journal of Busness, 59, Cosello,G., Fraser, P., & Groenewold, N. (2011). House Prces, non-fundamenal componens and nersae spllovers: The Ausralan Experence. Journal of Bankng & Fnance, 35,

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21 Conrbuons on Canadan Publc Polcy a he Bank of Canada, November, Wu, Jng., Gyourko, Joseph., & Deng, Yongheng. (2010). Evaluang condons n major Chnese housng markes NBER Workng Paper Seres Cambrdge, Mass: Naonal Bureau of Economc Research, July. Yao, Shuje., Luo, Dan., & Loh, Lxa. (2011). On Chna s moneary polcy and asse prces Dscusson Paper 71. The Unversy of Nongham, Chna Polcy Insue, March. Appendx A. Daa Source and Defnons Varables Defnon Sample Frequency Source HP Naonal Resdenal Monhly daa CEIC housng prces Invesmen Resdenal Housng Monhly daa CEIC Marke Invesmen Inflaon Inflaon rae Monhly daa CEIC Lendng Rae Fve year long erm Monhly daa CEIC morgage rae Copyrgh Dsclamer Copyrgh reserved by he auhor(s). Ths arcle s an open-access arcle dsrbued under he erms and condons of he Creave Commons Arbuon lcense (hp://creavecommons.org/lcenses/by/3.0/). 106