Causality between economic growth and real estate market

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University of Amsterdam

Causality between Economic Growth and Real estate Market

MSc in Economics Monetary policy and Banking

Name: Zhang Nan 10844791

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Abstract

This study mainly focuses on the relationship between real Gross Domestic Product and commercial housing turnover of Chinese real estate market, trying to find if there is Granger causality between economic growth and development of real estate market in China. I employ Granger tests by using a panel data of real GDP and commercial housing turnover in 31 provinces from 2000 to 2014 in China. The empirical results show there is Granger causality between real GDP and commercial housing turnover.

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1 Introduction

The research question of this thesis states: What is the relationship between real GDP and commercial housing turnover in China from 2000 to 2014? In other words, what is the relationship between economic growth and real estate market development in China? Before exposing the main results of this empirical study, it is mandatory to answer: Why this is an interesting topic? And after that, why is it relevant for this specific country? What is the actual meaning of the research question?

The hypothesis test for determining causality between two economic variables was introduced by Granger first in 1969. It is based on the statistical inference as follow: If the variable X causes variable Y, the change of variable X precedes the change of variable Y. Using the concept of distributed lag, Granger put forward the definition of causality relation between two variables: Assume {𝑌1𝑡, 𝑌2𝑡} are a bivariate time series progress, 𝐼1𝑡−1 = {𝑌1𝑡−1，

𝑌_2𝑡−1… … } , 𝐼 2𝑡−1 = {𝑌2𝑡−1, 𝑌2𝑡−2… … },𝐼 𝑡−1= {𝑌1𝑡−1, 𝑌2𝑡−1… … } denotes the information

available as of time t-1 in the entire universe. If the conditional expectation E(𝑌1𝑡|𝐼 1𝑡−1) ≠

𝐸(𝑌_1𝑡|𝐼 _𝑡−1) ≡ 𝜇1𝑡, we can say that 𝑌2𝑡−1 Granger-causes 𝑌1𝑡 based on hypothesis. As we can

see, his interpretation is based entirely on predictability. This means causality is defined merely by the ability of one time series to forecast another time series. In other words, on the condition of containing past information of variable X and Y, if the forecast effect of Y is superior to the forecast effect of Y only predicted by past information of Y, then we can say that 𝑋 is said to Granger-cause 𝑌. In addition, in the definition above, {𝑌1𝑡, 𝑌2𝑡} must be

stationary time series process. If {𝑌1𝑡, 𝑌2𝑡} is not stationary, E(𝑌1𝑡|𝐼 1𝑡−1) ,

𝑃(𝑌_1𝑡|𝐼 _𝑡−1),E{(𝑌_1𝑡− 𝜇_1𝑡)2_|𝐼

𝑡−1} will vary with time, making the result of Granger causality

test change over time.

Hence, restating my research question: Is it better to predict GDP on the condition of containing past information of GDP and commercial housing turnover than only by past information of GDP? And is it better to predict commercial housing turnover on the condition of containing past information of commercial housing turnover and GDP than only by past information of commercial housing turnover?

But, why is this an interesting topic and why is it relevant specifically for China? First of all, since the year 1998 of housing monetary reform, the consumer demand of real estate market

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expanded, making China real estate market flourish. Especially after 1998, the real estate industry has developed rapidly. And because the activity of market of the real estate made important contribution on improving resident's living conditions, driving the relevant industry to develop and spurring economic growth, it has become a very important factor to economic growth. As the guide industry to the national economy, the development of real estate market is very important for people's lives, the national fiscal revenue, as well as the development of the national economy.

It can be seen from Graph 1, from 2000-2014, commercial housing turnover grow every year with GDP almost at same speed except a drop in 2008 due to American financial crisis. Real estate industry has become an important factor in promoting China's rapid and sustained economic growth.

Graph 1

Second, housing is the basic element of life and it is directly related to people's livelihood issues. According to foreign statistics, real estate value accounted for 50% -65% of household wealth and is the most important part of the family property. In the enterprise, real estate value accounts for 30% -70% of the total assets. Xie Jingrong (2002) stated that higher the level of development of the productive forces is, the higher proportion of corporate assets real estate value accounts for.

0 10000 20000 30000 40000 50000 60000 70000 80000 90000 0 100000 200000 300000 400000 500000 600000 700000 200020012002200320042005200620072008200920102011201220132014

GDP and Commercial Housing Turnover

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Third, recent years, with the rapid development of the real estate market, housing price continued to rise and it led to the formation of real estate bubble. The status of real estate industry as pillar industry is threatened by risks caused by real estate bubble. It is necessary to discuss if China should keep the real estate industry as the pillar industry in economy and social progress.

Why is it relevant for this specific country? Because China’s economy has been growing about 10% per year in real terms over the last decade, and is projected by some to become the world’s largest economy in the coming decades. And the high financial risks will pose a threat to the economic stability of the world. One of the most urgent tasks is to regulate the development of the real estate market. To realize the effective regulation of the real estate market, policy makers must correctly and reasonably analyze the relationship between the real estate market and economic growth.

Given the above analysis, it is meaningful to study the relationship between development of real estate market and economic growth. Firstly, it is good for maintaining a sound development of real estate market. Secondly, it is beneficial for policy makers to implement proper policies if they know the relationship between development of real estate market and economic growth. Thirdly, financial crises can be avoided.

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2 Literature Review

It is necessary to introduce the paper “The Causality between Real Estate Market Development and Economic Growth-An Empirical Analysis to China”. In this paper, Pi Shun and Wu Kangping (2004) studied the relation between Chinese real estate market development and economic growth. Commercial housing turnover and Gross Domestic Production represent real estate market development and economic growth respectively. Using Granger causality Model based on Panel Data from 1994 to 2002, the author found a bidirectional Granger causality between Chinese real estate market development and economic growth. I apply the same Granger causality model but different time period 2000-2014 to study this topic. Because of longer time period of data variable, it is more convincing to illustrate the Granger causality between Chinese real estate market development and economic growth.

LHT Chui and KW Chau (2005) examined the Granger-causality relationship between Economic Growth, Real Estate Prices and Real Estate Investments in Hong Kong by the Granger Causality test first performed according to the experimental results in Guilkey and Salami (1982). Using the data from 1973:Q1 to 2003:Q2, authors found there is no relationship between GDP and real estate investments which contradicted the findings by Green (1997) and Coulson and Kim (2000). However, the lack of a relationship between real estate investment and economic growth doesn’t mean that changes in demand for real estate doesn’t influence economic performance. Since Hong Kong's real estate market is very efficient, changes in demand conditions in the real estate sector are reflected more accurately and quickly in real estate prices. And the empirical results of Granger causality showed that real estate prices, especially office and residential prices, lead economic growth.

In the paper “The interaction between Housing Investment and Economic Growth in China”, Liu Hongyu, Yun W.Park and Zeng Siqi studied the interaction between housing investment and economic growth as well as that between non-housing investment and economic growth with data from 1981 to 2000. Using Granger causality analysis, authors found that housing investment has a stronger short run effect on economic growth than non-housing investment. And in long run, housing investment has an effect on economic growth while economic growth has an effect on both housing and non-housing investment. Their findings indicates that housing investment plays an important role in the short-term fluctuations of economic growth,

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with its growth stimulating the economic growth and its slumps leading to downside fluctuations.

In another similar paper, Jie Chen and Aiyong Zhu (2008) investigated the long-run and short-run relationship between housing investment and economic growth in China. With the quarterly province-level panel data for the period 1999 q1 to 2007 q4，the empirical results support a stable long-run relationship between housing investment, non-housing investment and GDP in China. To distinguish between short-run and long-run Granger-causality, the Granger causality test was not applied in the common VAR specification but must was carried out in the framework of ECM (Error Correction Model). And because of diversities of economic development as well as very different degrees of housing market maturity in different parts of mainland China, the impacts of housing investment on GDP behave strikingly differently in the three sub-regions of China. The vast diversity of the Granger-causality relationship between housing investment and GDP across the three regions can be attributed to the very different contribution roles of housing investment in economic growth in these regions. Ray M. Valadez (2010) analyzed the relationship between the prices of houses and the United States GDP before, during, and after the period known as the “2007 global financial meltdown.” The purpose is to reveal the statistical correlation between housing and GDP. Tracking a housing price index and the U.S. GDP numbers over t five years from 2005 to 2009, the author found that there exists a relationship between the two variables such that a quarterly change in the housing price index may yield a quarterly change in Real GDP. However, many factors and forces created the perfect storm for the global financial crisis. The specific elements or combination of causal factors including the toxic mortgage debt that may have triggered the economic slowdown may continue to be debated far into the future. Many factors and forces created the perfect storm for the global financial crisis.

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3 Analysis of China real estate market

3.1 development history of real estate industry

Before having a more comprehensive understanding of China real estate market, it is necessary to review the development history of it.

Because of special political background, China real estate industry developed quite late. The development in the true sense began in the 1990s, so the development time has been twenty years until now. However, in this short two decades, real estate industry manifested strong vitality increasingly. With its rapid development and growth, the real estate industry has become the backbone of China economy.

On account of the negative effect of war and revolution, the percentage of urbanization in China was only 10.6% in 1949, fell behind the west over a century. However, since 1950, private property was not only recognized, but it was also protected by the state. In addition, countries have gave some renters’ speculation severe blow. These measures were beneficial to the stabilization of popular sentiments and real estate market.

However, from 1960s, the entire national economy was seriously deteriorated due to the Great Cultural Revolution, real estate industry involved. Except for private housing, all house building was carried out under the unified arrangement and management of the local people's government, making housing market lose its regulation function. Special political background eventually resulted in the stagnation of the development of real estate market during thirty years.

From late 1970s to late 1980s, the development of housing construction was slow under planned economy system. According to statistics, in the first 27 years of the reform, the government’s investments on housing construction only constituted 0.78% of GDP. In this background, the historic Third Plenary Session of the Eleventh Central Committee was hold and it played an important role in the development history of real estate industry. This conference shifted the focus of work to the economic development and decided to initiate the reform and opening-up policy, creating excellent condition for the development of real estate industry. In 1980, Comrade Deng Xiao ping put forward ideas about the housing system reform, including the overall design of housing production, circulation, distribution, and

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consumption. This is the beginning of Chinese housing reform and development of real estate industry.

But, in the early 1990s, the real estate industry also encountered some frustrations in the overheated development progress. In 1992, the economic growth rate is 14.2%, but the investment growth rate reached up to 117.6% that is about 8 times of the economic growth rate. And in 1993, the economic growth rate was 14.2%, but growth rate of real estate investment was 165% which is about 12.2 times of the economic growth rate. At that time, the development of real restate has exceeded limit of economic development. The high housing phenomenon and a glut of urban housing have emerged, and the word “house slaves” was produced under this background.

From 1993 to 1997, the government carried out tightening measures on the real estate market in order to control excessive development. However, in 1997, deflation emerged and the Asian financial crisis erupted and spread, causing the both internal and external problems in China economy. Therefore, the central government stressed on promoting consumption, expanding domestic demand, and boosting production. At this time, the real estate industry become the new driving force of China's economic growth because it accounts for a large proportion in the national economy and has a high degree of conjunction and strong driving force.

In 2003, the State Council issued <the announcement about promoting the sustainable and healthy development of the real estate market> and announced that the real estate industry is a pillar industry of national economy.

Meanwhile, as a result of the house price unceasing rise, real estate bubbles emerged. And because of macroeconomic control and the impact of macroeconomic changes, the direct contributions of the real estate industry to GDP growth were reduced in later years. People began to question whether the real estate industry should continue to be a pillar industry of the national economy.

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3.2 current situation of real estate market

It is necessary to indicate that the formation of China's real estate bubble originated from credit expansion and credit expansion is the most common reason for the formation of real estate bubble in many countries. Besides, there are some other special factors. Land finance, the advance purchase system for commodity housing are also major source of real estate bubble formation in China.

Bank loan is the main financing tools for real estate development enterprises, and recent years, financial institutions increased the amount of loans for enterprises in real estate market. During the progress that housing price continued to grow over and property bubble expanded, credit expansion played an important part.

Collyns and Senhadj (2001) found that the growth of bank credit had a significant synchronization effect on the rise of real estate prices in their study of four East Asian countries and regions (Thailand, South Korea, Singapore and Hong Kong in China). Based on this finding, they inferred that bank credit was one of the significant factors that contributed to the real estate bubble before the East Asian financial crisis in 1997.

First, a large number of commercial bank loans are concentrated on the real estate industry for the high expected earnings of real estate. Although commercial banks have been trying to improve the proportion of intermediary business revenue, but now interest income is still the main source of income of commercial Banks in China. During the housing market boom, real estate prices are soaring so that the bank loans are treated as high-quality real estate loans. Driven by profit, banks provide a stronger credit support for the real estate business. With the support of bank credit funds as well as national policy, real estate developers will be able to implement more projects, which made the real estate market flourish, but also threaten a property bubble.

Besides, preferential interest rates and reduce of down payment also promoted the speculations in real estate market. Because enterprises and individuals were easier to obtain real estate credit funds from banks, real estate prices continued to climb up, making real estate investment income greatly exceed the bank deposit interest income. Therefore, more and more companies and individuals turned their attention to the real estate market. Multiple housing purchase buyers can obtain high profits from multiple housing purchase in medium

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and long term. This profit-driven further stimulated the real estate market, aggravating the expansion of the real estate bubble.

Second, the bank management system is also one of the reasons for promoting credit expansion. In the current the banking system dominated by state-owned banks, the headquarters of the bank is basically responsible for and administer the credit risk management and risk pricing, and the performance evaluation of primary bank branches is determined by the scale of credit expansion. Expanding the credit scale is the main incentives of the branch of banks.

In addition, there is a mutually reinforcing cycle effect between bank credit and real estate prices. When the economy is in a boom, real estate prices rise, the value of real estate as collateral will also rise, thus households and corporations had much greater ability to borrow. So Households and corporations have much greater ability to borrow and the available credit funds can continue to be invested in the hot real estate market, thus promoting further rise in real estate prices.

China's real estate market credit expansion is regional. Due to the fragmentation of real estate market and the unity of the financial market, a lot of financial capital concentrated in the developed east area of China. Before 2005, the proportion of real estate development investment in eastern region was beyond 75%, and the proportion of personal housing credit exceeded 76%. This kind of imbalance of distribution of the financial resources didn’t change until 2006. Because financial resources can be gathered in some regions in the short term, the housing price in these regions will surge with excessive credit expansion.

With the rapid development in recent years, real estate industry has become an important source of local fiscal revenue. The real estate bubble with the main characteristics as high price has become prominent social issues. One of the important reasons for the high prices is that land finance policy of local government lifted the land price. Property developer passed higher costs onto consumers, thus house prices rised.

Land finance is a short-term behavior of local government to use land to exchange revenue in face of financial difficulties, including gaining revenue through land taxation, land use right granting, land financing, and other means. Land revenue and land mortgage bank loans has become the main source of a city and other infrastructure investments.

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The formation of China land finance is related to reform of tax sharing system and performance evaluation system of political achievement based on GDP and fiscal revenue as core. After tax reform in 1994, the central financial authority took a large amount of purse strings of local government, and in particular, value-added tax of 75% were owned by the central government. And since 2002, the fast-growing tax in local government were turned to taxes shared by the central financial authority and local government. However, during this progress, the local fiscal expenditure responsibilities increased instead.

These reform measures caused some problems in China fiscal system, because the fiscal revenue and expenditure responsibilities between the central and local government is not clearly divided, and is not symmetrical. After some financial power took by central financial authority, the local government is lack of sufficient taxes that can keep stable growth. The fiscal balance of local government can be easily broken, thereby inducing local governments to make use of land as an important source of supplementary income-related revenue. Due to fiscal decentralization, local government officials turned over higher GDP and fiscal revenue to show achievements, in order to get a promotion incentives. This kind of performance evaluation system of political achievement has become intrinsic motivation for government to pursue land finance.

Graph 2 0 10 20 30 40 50 0 5000 10000 15000 20000 25000 30000 35000 40000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Revenues of Land Selling and Annual Proportion in

Finance Revenue

Revenues of land selling (billion)

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Since 2002 of commercial land transfer implementation of "strokes linked to shoot"(tender auction listing transferring state-owned land use rights provision), the nation's land prices rose significantly with a growth rate about 8.9% per year, bring considerable revenue for local government.

In the Graph2, data shows that in 2002, revenue from land selling is 2416.79 billion yuan, accounting for 16.26% of local revenue in that year. The revenue rise up fast every year, and in 2007, it grow up to 12216.72 billion yuan, taking up 19.27 percent of local government fiscal revenue. In 2008, despite nearly 50 percent of the land was sold in a floor price, leading a decline in local government land, the local government still got 10259.80 billion yuan. Revenue from land has literally become the local government's "second finance tool."

Advance purchase system for commodity housing is the institutional root of the real estate bubble. Initially, the set of housing presale system was intended to reduce the real estate industry barriers to entry and encourage more enterprises to enter the real estate industry,in order to facilitate the smooth conduct of China's reform of the housing system. However, in the absence of a sound legal system, credit system and the real estate market regulatory system, housing presale system has gradually become a tool of real estate developer for excessive credit expansion and risk transfer.

Firstly, China's housing presale system is unilateral risk-taking mechanism. More consideration is for the interests of real estate developers and preventing the risk of real estate developers, but less for the risks of buyers and commercial banks. So that the financial risk of such a system arranged by the buyers or commercial banks to bear. Therefore, the financial risk caused by this kind of system will be borne by the buyers or the commercial bank.

Second, housing presale system not only reduces the financing costs for developers to enter the real estate market, but also reduces the financing pressure of developers. Real estate developers can take advantage of the real estate asymmetric transaction information state, making supply-demand unbalance state and raising prices through various means for profiteering.

However, in addition to the above-mentioned factors, there is another important institutional reason for real estate bubble—shortage of land. On the surface, the factors that push housing price to rise is that the supply is not adequate to the demand. But the underlying cause is that

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China's land supply shortages caused tension housing stock. The implementation of the food security strategy caused land supply shortages because the minimum of cultivated area is 18 billion mu.

There are huge risks hidden in Chinese real estate market because housing bubble—fiscal risk and financial risk.

Recent years, with the development of China real estate market, fiscal risk increased because the land finance is unsustainable.

First, land finance is unstable. Policy in land primary market (land expropriation) and secondary market (construction land) make the local government have land monopoly management rights of land monopoly rights. And “strokes, shooting, hanging” helps local government gain huge profits from land expropriation with low cost and land auctions with high price, increasing revenue dependency of local governments on the property market. However, we have to take food demand of 13 billion and the limitations of requisitioning land, non-renewable resources into consideration. The real estate market also has cyclical fluctuations, so the land price can’t always be expensive. When the market condition changes, drops in land values will be unavoidable. Therefore, revenue from land finance is unsustainable.

Second, land finance is one of the important factors leading to the decrease in the amount of cultivated land in our country. According to the empirical analysis of Du Xuejun, Huang Zhonghua (2009), land finance has a negative impact on the amount of arable land and the elasticity coefficient of impact is -0.01. In other words, every percentage point increase in land finance will make 0.01 percentage point decrease in cultivated land. The data of the Ministry of Land shows that only in eight years from 2001 to 2008, the amount of arable land reduced to 1.25 million acres. If left unchecked, according to the average annual reduction in the figures, minimum amount of arable land will be breached.

Third, land finance gravely damaged the interests of the nationals. Under the existing law, our country implements the public ownership of land, so allocation and reasonable use of revenue from land finance proceeds should represent the interests of the whole people. However, data show that the allocation proportion of the local revenue from land is as follows: Famers can only get 10% - 15%, the collective gets 25% - 30%, and government and other institutions get

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60% -65%. Unequal status of property rights entity in the allocation of revenue from land finance makes farmers lose the equitable sharing right and become landless vulnerable groups. Obviously, this kind of land finance is inconsistent with China's urbanization because the urbanization of China must not sacrifice the benefits of rural regions and peasants. It will be difficult to realize modernization for China if the problems of 5 billion farmers can’t be solved. Fourth, land finance may also trigger financial risks. In the land finance, a considerable part of the city construction funds are obtained by taking government credit as guarantee and the reimbursement time of these loans do not exceed 2 years. If the land price is not high, and the ability of local government to repay the loan is limited, the local government will have to use other ways to obtain fiscal revenue for reimbursement. In fact, the scale of loans backed by government credit often exceed the scale of local government finance revenue, thus financial Risk will appear.

Nowadays, financial risks caused by real estate bubble are highly concentrated in the commercial banking system. Because banking system has inherent vulnerability due to its operation characteristics and real estate market is prone to creating bubbles.

The damage caused by real estate bubbles towards a country’s economic is determined by its dependence on bank loans. The mature real estate financial markets of developed countries provide diversified financing modes to secure the fund supply of real estate enterprises. Except bank loans, these diversified financing modes include real estate investment trust, enterprises listing and financing, corporate bonds and other various channels. What’s more, in these mature real estate financial markets, the percentage of bank loans won’t exceed the total amount of real estate financing funds. However, in the country where the banking system is in a dominant position, such as America before the Great Recession (banks hold 65% of all US financial assets), the real estate bubble and its collapse will has more serious negative impact on national economy. Due to the serious lag of financial system reformation, the financing channels of real estate industry is quite simplex in China at present,and it greatly depends on the bank, and the debt rate keeps the high trend. Moreover, a lot of money floods into Chinese property market, resulting in overheated real estate investment and thus the imbalance of supply and demand in the real estate market. In addition, Chinese national banking is still on the early stage of development and its risk-resistant ability is relatively weak. The marketization of Chinese real estate market just began and real estate industry hasn’t met

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the severe test. Once there are sharp fluctuations in real estate industry and housing bubble burst, risks of enterprises will transform into bank risks and a large amount of credit funds are unlikely to be recouped. The formation of a large number of bad debts and low quality assets will make the banking system face enormous risks.

Larger the real estate bubble is, higher the repayment pressure of resident buyers is. Thus, it is more difficult for resident buyers to repay the loans.Several years ago, with the adjustment of real estate prices, the tidal wave of home foreclosures swept over some province of China (especially Shen Zhen province).In the first half of 2008, with the sustained decline of housing price in Shen Zhen province, many people found the value of their houses has fallen and even the value of bank loans they owe exceeded the market value of their houses. In other words, their houses have become negative net wealth at that time, thus some people chose not to pay back the bank loans. Even though the foreclosures phenomenon in real estate market of Shen Zhen is just a regional case, it has given the alarm to real estate enterprise, banking system and government. When a larger real estate bubble appears and eventually burst, it is likely that US-style subprime mortgage crisis will happen in China.

Given the above analysis, it is necessary to discuss if China should keep the real estate industry as the pillar industry in economy and social progress.

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4 Data and Method

4.1 Data

Based on granger causality hypothesis test, this paper studies the mutual influence between the development of real estate market and economic growth.

Yearly panel data from 2000 to 2014 in 31 provinces is used for this empirical test. The development of real estate market is represented by commercial housing turnover in different provinces, denoted by Turnover. And Gross Domestic Product represents economic growth, denoted by GDP. In this paper, GDP and commercial housing turnover are adjusted by CPI. All data sources are the China Statistical Yearbook years.

Graphs below shows the first-order difference of natural logarithm of variable real GDP and variable commercial housing turnover.

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4.2 Method

First, in Granger causality tests, data variables have to be stationary. In this paper, I take the first-order difference of natural logarithm of variable real GDP and variable commercial housing turnover. The natural logarithm of variable real GDP and variable commercial housing turnover are donated by ln GDP and dln turnover respectively. So dln GDP and dln turnover donate the first-order differences of ln GDP and dln turnover. According to unit root test, variable dln GDP and dln GDP and dln turnover are stationary.

Second, lagged differences of the independent variable are determined by Akaike Criterion. The model includes ln GDP , first lag of ln GDP , dln turnover and first lag of dln turnover. Third, the model is fixed effect model with variable intercept model. Because fixed effect model with variable intercept model can help analyze the relationship between real estate market and economic development by control fixed regional variation.

The final regression model is:

𝑑𝑙𝑛𝐺𝐷𝑃𝑖𝑡 =∝𝑖+ 𝛽1𝑑𝑙𝑛𝐺𝐷𝑃𝑖𝑡−1+ 𝛽2𝑑𝑙𝑛𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡+ 𝛽3𝑑𝑙𝑛𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡−1+ 𝜇𝑖𝑡

𝑑𝑙𝑛𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡 = 𝜆𝑖+ 𝛽1𝑑𝑙𝑛𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡−1+ 𝛽2𝑑𝑙𝑛𝐺𝐷𝑃𝑖𝑡+ 𝛽3𝑑𝑙𝑛𝐺𝐷𝑃𝑖𝑡−1+ 𝑣𝑖𝑡

Where 𝛼𝑖 and λ𝑖 represents difference of different provinces, 𝛽𝑖 and 𝛾𝑖 are coefficients of

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5 Empirical result

𝑑𝑙𝑛𝐺𝐷𝑃𝑖𝑡 =∝𝑖+ 𝛽1𝑑𝑙𝑛𝐺𝐷𝑃𝑖𝑡−1+ 𝛽2𝑑𝑙𝑛𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡+ 𝛽3𝑑𝑙𝑛𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡−1+ 𝜇𝑖𝑡

𝑑𝑙𝑛𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡 = 𝜆𝑖+ 𝛾1𝑑𝑙𝑛𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡−1+ 𝛾2𝑑𝑙𝑛𝐺𝐷𝑃𝑖𝑡+ 𝛾3𝑑𝑙𝑛𝐺𝐷𝑃𝑖𝑡−1+ 𝑣𝑖𝑡

Table 1

According to F test value, causality from turnover to GDP can be determined by the joint hypothesis 𝛽2 = 𝛽3 = 0. In the same way, causality from GDP to turnover can be determined

by hypothesis 𝛾2 = 𝛾3 = 0.

As it shows in the table, on 1% significant level, the hypothesis GDP Granger-causes commercial housing turnover is accepted. Meanwhile, the hypothesis Commercial housing turnover Granger-causes GDP is also accepted.

Variable Coefficient Std. Error t-Statistic Prob.

GDP Granger-causes commercial housing turnover

𝑑𝑙𝑛𝐺𝐷𝑃𝑖𝑡−1 0.434*** 0.046 9.54 0.000

𝑑𝑙𝑛𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡 0.042*** 0.006 6.63 0.000

𝑑𝑙𝑛𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡−1 0.056*** 0.007 8.05 0.000

Commercial housing turnover Granger-causes GDP

𝑑𝑙𝑛𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡−1 -0.295*** 0.056 -5.29 0.000

𝑑𝑙𝑛𝐺𝐷𝑃𝑖𝑡 2.538*** 0.383 6.63 0.000

𝑑𝑙𝑛𝐺𝐷𝑃𝑖𝑡−1 -0.070 0.396 -0.18 0.860

*** p<0.01, ** p<0.05, * p<0.1

Table 2

From Table 2, we can see the coefficients of all variables. As expected, Turnover has positive effect on GDP. GDP also has positive effect on Turnover.

F value 1% significant level GDP Granger-causes commercial

housing turnover 47.04 Accept

Commercial housing turnover

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6 Conclusion

According to the empirical results of the research, we can conclude that there is a two-way Granger causality between development of Chinese real estate market and economic growth. The result indicates that development of the real estate market has promoted economic development effectively and China's economy sustaining fast increase has also contributed to the prosperity of the real estate market.

The development of real estate industry can drive many industries to develop. First, the real estate industry output accounts for a considerable proportion of the gross national product and becomes fixed assets, providing a lot of revenue for government. Second, the development of real estate industry can drive a series of related industries to develop, such as architecture, metallurgy, materials and real estate service, and provide more employment opportunities to accelerate national economy development. In addition, under the global economic downturn, the development of real estate market can still support economic growth. Meanwhile, the development of real estate market also Granger-cause economic growth. Because, the development of related industries, particularly high technology and financial industry, also accelerate the development of real estate industry. Hong Kong’s economy development proves the point: After war, the fast increase of investment on real estate industry attracted a large amount of foreign capital to shipbuilding industry, shipping industry and finance industry in Hong Kong. The maturing of these industries made real estate market prosperous in different times, producing an increasingly large number of wealthy individuals. According to Forbes magazine, five of the top ten richest people in the world are people who transferred to real estate industry from related industries.

Granger causality between the development of real estate market and economic growth provides an important instrument in macroeconomic control.In the early 1990s, inflation has been effectively controlled by real estate market and China’s economy realized soft landing successfully in the case of local overheating. In the late 1990s, the explosion of financial crisis in South-east Asia made global economy was in downturn. China maintained sustained and sound economic growth through boost consumption in the real estate and auto markets.

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Moreover, Granger causality between the development of real estate market and economic growth can help policy makers deal with the potential risks problems in real estate market correctly.As I mentioned in the analysis of China real estate market, the academic world and practice world think the collapse of housing bubble will cause great damage to finance and economy systems. Some scholars consider the status of the real estate industry as a pillar industry of the national economy should be revoked. The results of this paper provides scientific evidence for policy makers. Despite of the potential risks, causal relation indicates that the status of the real estate industry as a pillar industry of the national economy should not be revoked. Whereas Chinese actual economy developing complexion, once the real estate industry is no longer a pillar industry, many related industries will be seriously affected and economy will become worse.

Granger causality indicates the problem rising in the development of real estate market should be solved by institutional innovation. Obviously, economic growth is the main goal of social development and the measures to prevent potential risks have to obey this principle. Therefore, some measures should be taken not only to prevent risks caused by real estate bubbles but also to maintain steady economic growth. Thus, it is infeasible to strengthen supervision and restriction in real estate market. If there is no bidirectional Granger causality between economic growth and the development of real estate market, policy makers can aim at preventing risks and strengthen regulation and oversight of the real estate market. But the empirical result tell us that there is bidirectional Granger causality between economic growth and the development of real estate market, so policy makers need to implement risk management by institutional innovations. For instance, it is necessary to deepen the reform of land use system in the future. If the auction sale rights and income rights of state-owned land are withdrawn central government, it is possible to lower the cost of housing (Land prices and additional taxation accounts for 50-60% of house prices on average). It will help to prevent the real estate bubble. The government can implement different policy to commercial housing and affordable housing in the progress of deepening financial reform. Banking system provides credit support to commercial housing, but the government provides subsidies or carry out national preferential policy to affordable housing.

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Causality between economic growth and real estate market

University of Amsterdam