Analysis on China real estate industry

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Final Five

杜洋,张乃嘉,肖运超,郭佳欣,鲍晨明


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Introduction

Nowadays, the topic about Chinese real estate market could be the hottest. We have done some research on the Chinese real estate market in this report, and we would like to focus on the Chinese real estate bubble analysis. Firstly, we built a real estate bubble measure model, we tended to find whether there existed bubble in Chinese market and its trend in quantitative view. Secondly, basing on what we did before, we would do the causes analysis and trend prediction focus on the Japan and Chinese market, and a recommendation would be given at last.

Executive summary

As the capital market developing fast, the real estate is playing a more and more important role in Chinese economy. Recent years, the price of houses in some area of China has raised a lot. The public including many researchers doubt that there exist real estate bubble in Chinese market, and they worry that Chinese could step in the Japanese footsteps twenty years ago. Researchers have done a lot in anglicizing the real estate bubble in China. Qi Liexiu (2005) thinks that in current market situation, China do not exist obvious real estate bubble, after anglicizing the relationship between house demand and supply in China, only some investment demand is magnified that make some area seems abnormal, he considers more about the role of government, though there exist bubble risk, it could be controlled through appropriate currency policy and the government action.

Jia Zuguo (2008) indicates that China is in a process of urbanization, and this is different from Japan. In the urbanization process, the raise of house price is normal and necessary. In 1985, the urbanization rate of Japan is 85% while it is 45% in China nowadays. Peng jianlin (2009) has used econometrics method to evaluate the Chinese real estate bubble, he pointed out that in some part of China, especially in central north, their definitely exist a bit of bubble. Through He Weida’s research (2010), he thinks the current Chinese real estate market do not emerge obvious bubble, but it faces much bubble risk, in China nowadays, there are only 10% people could payoff the cash, most buyers are still rely on the mortgage loan, by the way, the consensus towards the income and house price in the world is 1:6 while it is 1:20 in China.

Real estate bubble measure analysis

Firstly, we use AHP to analyze whether there’s bubble in China real estate industry based on date from 2006 – 2009.

1)  Model Building

To better evaluate the degree of bubble risk we facing, we have design a evaluate model base on some existed research. We hope that we could use the model to analysis the problem in quantitative view. We choose x1, x2, x3, x4, x5, x6, x7 seven variables. After we analysis the former research and the data we gathered, We conclude these seven variables could better evaluate the degree of the real estate bubble we facing right now, and later we will use data we gathered to demonstrate it.

X1: Housing price growth rate/GDP growth rate

The housing price has a close relationship with the macroeconomic of a country. The variable we choose can reflect the deviation from the real estate to the economic conditions.

X2: Real estate loans growth rate

As we know, the more leverage we use in real estate market, the more bubble risk we face, this variable could let us know the degree of how much leverage we use.

X3: Real estate investment/ investment in fixed assets

Through this variable, we could find whether the investment in real estate is synchronized to the investment in fixed assets. If there are different changes, there will be the bubble risk.

X4: Housing sales price index/Rental price index

This variable is used to evaluate the investment demand for real estate. As we know the real estate bubble is affected by the investment demand to a certain extent.

X5: Housing price/ Average revenue

We could use this variable to evaluate whether the housing price fit for the affordability of the habitant. If the housing price could just be accepted by a few people, there exists bubble.

X6: Growth rate of real estate sales area

We could get to know the fundamental situation of the real estate market, but we couldn't make a decision only by this index.

X7: Bank long terms loans rate

The currency policy is playing a very important role in real estate market. There are a few people that could afford the price by themselves. Most people must get assist from financial organization. Besides, as we know, the reason that leads to the destructive shock in Japan 1990s is also the wrong currency policy.

Bubble=aX1+bX2+cX3+dX4+eX5+fX6+gX7

After integrate the seven factors, we could evaluate the real estate bubble we facing in quantity.

2)  Fixing on the coefficient ----Base on AHP

In this part, we would like to use AHP (Analytic Hierarchy Process) to settle the coefficient of every variable. At first we will built the comparison matrix.

Base on the data we got, and use the Expert Analysis method, we’ve got the comparison matrix, it shows that the relative importance between two variables.

Join now!

Comparison matrix:

Table 1

Follow AHP, we build Standard judge matrix:

Table 2

Using the judge matrix, we got coefficients:

Table 3

After got the coefficients, follow AHP, we should check the consistency of the result we got:

Check:

K1=7.587        

K2=7.450

K3=8.167

K4=7.785

K5=8.394

K6=7.281

K7=7.15

Average K=7.688

CI = (7.688-7)/6=0.115

To check the freedom index we could got RI

Table 4

CR=CI/RI=0.087<0.1

Because of CR<0.1 we could say that the coefficients we got is believable.

After AHP analysis, we got the model:

Bubble=0.15X1+0.07X2+0.36X3+0.04X4+0.20X5+0.08X6+0.10X7

X1: Housing price growth rate/GDP growth rate      

X2: ...

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