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: Real estate loans growth rate
X3: Real estate investment/ investment in fixed assets
X4: Housing sales price index/Rental price index
X5: Housing price/revenue
X6: Growth rate of real estate sales area
X7: Bank long terms loans rate
3) Data analysis
We got the recent 4 years data of every quarter, to calculate the degree of real estate bubble as below:
Table 5
(Source: National Bureau of Statistics)
We put the data into our bubble evaluation model, and we got the result as below:
Figure 1
Reasonable value evaluation
According to the previous research and some consensus in the world, we choose a rational value for each variable, and we got a reasonable value for the bubble evaluation through the model we design:
Table 6
Through the graph we got, it obviously indicates that before 2009, the Chinese real estate market turn out to be smooth in general. Except for a fluctuation during 2006-2007, we think it is related to the change in capital market. But after we get in 2009, the bubble evaluation index keeps a high growth rate. In general, the bubble index is higher than the normal value. We think that the bubble emerged.
As Figure 2 below we could concluded that variable X1 (the Housing price growth rate/GDP growth rate) and X5(Housing price/revenue) keeps grow, it indicates that the high housing price or the high growth rate is not droved by the economic growth, under the higher and higher price, there are not indeed demand support, it is just the magnified investment demand make the real estate inflate.
Figure 2
4) Conclusion:
From the fourth quarter 2008, there begin to emerge real estate bubble, in 2009, the bubble keeps growth, we should take some measures to deal with the problem.
Causes of Bubble Analysis
Based on the above analysis, we’re going to discuss the causes of bubble in 4 aspects compared with Japan’s bubble.
1) Characteristics of land resources
Land is a non-renewable resources, combined with the trend of urbanization in China in recent years, land became extremely scarce resource. Its scarcity shows as follows: the population shows greater demand of owner-occupied housing, while the short term, land supply’s elasticity is small, which means a small change in the demand will affect the housing price largely. The gap between the two causes the optimism expectations of price in the future, resulting in increased demand for housing speculation, so that the total demand for housing to rise further. If the cycle continues, the characteristics of the land as a scarce resource will show more clearly.
2) Characteristics of the real estate market
Industry Characteristics:
Real estate industry is a industry with high-risk, long construction period, and it is constrained by land supply. It is a capital-intensive industry. As the entire industry requires significant capital investment, financial institutions are involved and earn high profits.
Seller:
Currently, China's real estate market is a seller's market. It is common in real estate industry that developers hold a few sites, but slowed down the process of opening in order to increase profits. In addition, the "housing pre-sale system" exists in the market is one of the reasons causing price rise. Housing pre-sale is an agreement made between the real estate development companies and buyers. The buyers deliver the deposit or advance payment, and then own existing homes on a certain date in the future. This is in fact a sale of purchase rights. Through exploit of housing pre-sale system, people sell and buy the housing for several times to meet the needs of their speculation, that is, they generally will not allow housing stay in hands for too long time. And at the same time, because of the need for rapid exchange, speculators increase costs of inputs in the ads publicity, resulting in high housing price. And also, pre-sale housing advances consumers purchase time, making the already short supply of real estate market tenser.
Buyers:
As the real estate has the characteristics of easy to go up but difficult to fall down, besides the consumer demand, it also arouses the public's speculative demand. High housing demand and limited land resources lead to rising house prices. The current investors’ optimistic expectations increase speculative demand.
According to expectation return model, people’s optimistic expectation on investment return will cause the further rise of housing. The model is based on expected revenue
E (R) =ΣF (Pi) V (Li) (i = 1 .... N).
From the model, we can know that when investors has an optimistic expectation on real estate, that is, the probability Pi increasing, and investment income Li increasing. Integrating these factors, expected return on investment becomes higher. People expect real estate prices to rise, and in order to get the capital gains, large amount of capital flows into real estate. Therefore, a good expectation of real estate accelerates the rise in real estate prices.
In addition, combined with central bank lending rates continue to drop, in "herding" effect, people get more money to buy home. The above factors interact and ultimately lead to more severe market conditions in short supply. Finally, the expectations of price rising ultimately become a reality.
Structural contradictions existing in China:
People’s needs in low-cost, small and medium size apartment are in serious shortage of supply, while the luxurious and large size apartment (90 square meters) of high-end housing supply is above normal. Currently the ratio between the two is about 3:7, while the ratio of residents in low-income persons with high income is about 8:2. Structure of housing and income structure is on the contrary, and even serious dislocation. This not only resulted in shortage of effective supply, but also promotes the rapid rise in house prices.
3) Factors of Financial Institutions
Financial institutions play an important role in the real estate market.
First, in the process of socio-economic development, financial institutions themselves are also facing rapid development time. They need to continuously expand their business, and the market demand for its own expansion has brought about a series of changes.
In addition, the bank creates a very favorable loan terms to land developers, up 70% premium to the equivalent of a loan can be offered by government. Investors who obtain loans can purchase land for further development. At the same time, we note that recent two years, the state enterprises which are been titled as "land lord" frequently appear. It is mainly because the government relaxes the conditions of bank credit and the most beneficiaries are those large state enterprises. Loans from banks flow into those enterprises, making the central enterprises have money to buy, forming one after another "land lord". Land bubble planted a hidden danger for the real estate bubble.
Third, financial institutions’ strong support of the real estate development create very favorable conditions for speculators, resulting in sufficient funds for housing exchange, led to further real estate bubble.
Fourth, bank lending gives people good expectation for real estate. Besides speculative demand, it also stimulates people's consumption demand. People have access to get loans, and participating in purchasing house. Rising demand finally leads to price increasing.
(In external business, irrational people need a large number of capital. Financial institutions tend to offer lower interest rates for housing credit using houses as mortgage, considering the prospect of real estate. So, large amount of capital flows into the real estate market. This approach has provided funds for the protection of speculators, and artificially increased the demand for real estate.)
On the other hand, considering the bank's own interests, when the bank holds a large number of real estate, its assets would be overvalued, thus enlarge the bank's capital base and its asset quality and profitability. Under these conditions, the bank will further expand housing credit, which further promoted the rise in house prices.
4) Government Factors
Defects in land transfer system:
In China, the ownership of land belongs to country. While, defects in China's current land transfer system also boost the high prices. When the real estate business needs to purchase land, you need to pay land transfer fees to the government. Of these, 70% of the transfer fee to the local government. As a result, driven by political achievements and rise of GDP, local governments sell lands at high prices through bidding, auction and licensed. This directly results rising house prices based on expensive land. In addition, the land transfer system provides a space for the rent-seeking. Rent-seeking costs also contribute to existing price.
Related to economic policy:
In the year of 2006, the exchange rate of RMB against the dollar increase continuously. So far, the RMB exchange rate has been increased from 1:8 to 1:6.81. Under the pressure of currency appreciation, Chinese export, which contributes to over 1/3 of GDP and takes advantage of low price, experienced damage. Thus, in the next few years, the central bank lowers interest rates five times in succession. As other economic crisis around the world, the policy of lowering interest rates caused by currency appreciation has not guided capital flows into real economy. Instead, capital quickly enters the real estate industry, which has led to today's high demand for housing and high housing prices.
Trends Analysis
After discussion the causes, we will predict the trends by comparing the difference between China and Japan under researches and data analysis.
1) Chinese Government’s Control on Financial Systems.
The efficiency of banking regulation is inferior to Chinese ones, and the enterprises in Japan are more independent than Chinese ones. Before the bubble, the Japan government fails to exert effective regulation and guidance for the commercial banks, while the financial institution are the biggest supporters for the real estate bubble, fueling the bubble for almost 10 years.
On the contrary, Chinese government possesses strong power to keep the banks and enterprises in regulation, by guiding the direction of the money, containing the speculation capital at the very beginning, implement policies at proper time, and hurdling the property bubble.
Bank of China, the country's third-largest listed lender by assets, announced this week that profits rose 26 per cent last year to Rmb81bn but, as with ICBC, the growth came on the back of a big expansion in credit and at the cost of falling margins. Both banks said they intended to cut back on lending this year in line with strict government quotas imposed at the start of the year because of worries that rampant credit growth has created asset bubbles, particularly in property.
Although the Chinese government started to encourage the mortgage from 2009, to stimulate the real estate investment behavior, especially encourage the construction of affordable housing to ease the difficulty in house buying, the government is persistently strict with supervision of bank business in mortgage. The supervision process is complex and requires assessment in the loan applicant's business activities, repayment ability, and study the profitability of investment projects. And at the same time, the mortgage real estate ensures the credit of lenders. Al these actions prevent banks from uncontrolled, low-security lending behavior and also inhibit the real estate market speculation to some extent.
In addition, due to the level of Chinese economic development have not reached the level of Japan in late 80s 20th century, and the constraints in financial system, Chinese government is relatively strict with the supervision of financial sector, especially with the object of financing, such as prohibition of loans entering into the stock market. These actions reduce the credit risk of financial institutions and prevent sowing the seeds for the huge amount of irrecoverable debts.
China Japan
Table 7
However, we must have a clear conscious that, from the second half of 2009, to encourage real estate investment, the Chinese government relaxes the policy requirements for lending, resulting in a substantial growth of domestic lending part of investment and development funding.
2) The Difference of Urbanization
The urbanization rate of Japan scaled the height of 76.7% in 1985, indicating the end of urbanization process; yet China is still accelerating in the progress of urbanization, reaching only 45.68% in 2008. In comparison with the developed countries with the urbanization rate of 90%, more and more population will be shifted from rural areas to cities. The population of rural areas was only 34% of the total population when the Lewis turning point appeared in Japan in 1960s; and the percentage of rural population is 34% for North Korea when the Lewis turning point appeared in 1980s. China has a long way to go. What’s more, there is a much more vast area of the real estate market in China than Japan, when the risk accumulated quickly in one specific area, the capital will shift to other cities. The development of transportation enhances the shift from first-line cities to second-line cities. Therefore, the breadth and depth of the Chinese real estate market is unmatchable by Japan, with the immense volume of accommodating risk.
Figure 3
3) The Difference of Demographic Structure
The total population of Japan reaches its pinnacle in 1990, while the total population of China won’t reach its peak until 2030. Lewis turning point, the indication of the transform form the rural labor to urban labor, appeared in Japan at the end of 1960s. However, China saw the Lewis turning point around 2007. The demographic dividend (the large portion of potential efficient labor) of China will persist to around 2015 in comparison to Japan, where the demographic disappeared in 1980s. Furthermore, China could achieve a second round demographic dividend through establishing creative systems, social security system, improving the labor market, enhancing the education level and job training, abolishing the household registration system.
Figure 4
Economic indicators before and after the Lewis turning point
Table 8
(Source:Arthur Kroebor(2010))
4) Monetary and Exchange Rate Policy
The origin of Japan's stagnation for the 20 years after its housing bubble burst lies in its failure to stand up to US pressure for the yen to appreciate. Indeed, the yen rose from a low of Y260/$ in February 1985 to Y200/$ 10 months later and on to the high of Y80/$ in May 1995. Japan's economic performance in the past 20 years has lagged its potential. In fact, policy counter-measures – monetary easing and fiscal stimulus against too-rapid yen appreciation – grew stronger in 1986. Monetary easing continued until 1989. Considering what was going on in the property market, this monetary tightening and strong regulatory measures, such as restrictions on loan-to-value ratios, should have been applied much earlier, in 1987 or 1988. The bubble may not be completely avoided purely by monetary tightening, but the damage may be reduced by early tightening and prudential regulations.
The Chinese authorities are doing better than their Japanese counterparts in the 1980s. The central bank is tightening regulation of loan-to-value ratios and trying to end easy credit. But they are hesitating to take up the best policy – interest rate hikes and appreciation of the Chinese Renminbi. The property bubble is a clear sign of overheating. China's reported inflation rate does not show rampant inflation, but that was also the case in Japan in the 1980s.
5) Investment Demand in China
The need of investment in property market is huge in China, which should be satisfied. To some extent, the investment need is rigid demand, while the dwelling need is merely soft demand. The unusual prosperity in Chinese real estate market is highly related to the limited channel to invest in China, where the lower tax of household transaction and the demographic structure each play a role. An important reason for the real estate bubble in Japan was due to the aging of the population, when the passion for investment faded. However, the average age of Chinese people is around 32, which is the peak period of investment with overwhelm passion. Therefore, even though the adjustment is made upon the property market, the investors will not be too pessimistic to lead to the irrational plummet of the real estate market. What’s more, the real estate market in China is contained by the monopoly by the government and the storing of real estate companies, while the demand is promoted by the process of urbanization, resulting in the demand over supply. It is quite different from Japan, since the prosperity is backed up by real demand of investors and consumers.
Conclusion:
As mentioned before, based on our research, comparison and analysis, our point of view is that there is slight bubble in China property industry, which is different from the one happened in Japan and was less severe. Thus, if China government can take immediate and effective action to deflate the bubble, China property industry can still lead a healthy and promising future.
Recommendations to Deflate Bubble:
Finally, we come up with some recommendations to deflate the bubble.
1) Reinforce the supervision and control of real estate market
On one hand, China’s transaction system of land and the industry supervision system is still developing, which accelerates the speculation and results in slight bubble. On the other hand, over-investment on property make the overall growth of property industry surpasses the growth of urbanization significantly and results in the imbalance between supply and demand and the increase of housing vacancy rate.
Thus, first about how to prevent over-speculation, it’s essential for the China government to make out specific policies for all-round supervision of the real estate market. No only national policies , but also policies based on different situation of local places, especially those developed cities. Even though speculation on property in China is not as heat as the one in Japan, the first step to deflate bubble is to establish the basis for supervision and control by setting specific and reasonable policies.
As for cool down the over-investment on property, the government should keep controlling the scale of property development at a stable speed. That is, first to invest based on local places income level and reduce overstock. Second, to reinforce the supervision on second market and prevent over-speculation. Last is to further develop housing based on real demand, sector with deep insight of property market and make Property the leading industry in China without bubble.
2) Strengthen land resources management
Government can keep a good control on housing price through the supply of land resources. The supply of land resources should be based on local market demand and public bids system should be used under supervision. The usage of land resources should also keep a balance between housing and business use. Furthermore, to punish irregular investment and development, keep a close supervision on the developers, and make necessary amendments to the rules and regulations are important. Besides, it’s necessary to prevent corruption among the government and developers in China as to strengthen land resources management.
3) Build up a sound forecast system for healthy development of property industry
As important as supervision and control, building up a sound forecast system is crucial for risk management ,come up with timely reaction and deflate bubble. By collecting & analyzing information on property market, predicting and evaluating properly on the market based on analysis and publishing research report by period, the government can make out proper policies and better supervise property market. Also, the investors and developers can have a better and clearer evaluation on the whole property market, which may benefit reasonable investment.
4) Strengthen supervision on finance sector and prevent loan risks
There is a strong combination between property sector and finance sector, no matter in Japan or China. To deflate the bubble, it definitely should strengthen supervision on finance sector and take financial strategy to deflate the bubble.
For example, China had made several moves in the last month to do just this, including reimposing a sales tax on homes sold within five years of their purchase from this year and increasing the down payment requirement for property purchases to at least 50 percent of the total price. In another move to cool the property market, the People's Bank of China, the central bank, announced on Tuesday to raise the deposit reserve requirement ratio by 0.5 percentage points from Jan.18 this year. The government also renewed its pledge on Wednesday to stabilize home prices by providing more affordable housing and cracking down on speculation.
5) Keep the RMB exchange rate’s long-term stability
In 1985, Japanese yen’s appreciation was forced under the great pressure put by America. Then to alleviate depression caused by decreasing exports, Japan’s government substantially reduced the interest rate to stimulated domestic demand, which Led to the expansion of real estate financing and become the driving force for real estate bubble. Learning from this, China should Keep the RMB exchange rate’s long-term stability.
Reference:
<1> 刘兆成. 日本泡沫经济成因及其对我国房地产业的启示. 辽宁行政学院学报, 2008(6): 10.
<2> 李静怡. 日本房地产泡沫对我国房地产市场的启示. 中国商贸.
<3> 唐元璋. 日本金融政策对房地产业的影响. 科技创业, 2004(9).
<4> 曹建海. 从日本地产泡沫破灭看中国房地产发展. 城市住宅, 2009(9).
<5> 赵曼曼 周文魁. 我国房地产泡沫及其成因分析. 企业导报, 2009(3)
<6> 徐珊. 我国房地产泡沫的特殊诱因分析. 经济关注.
<7> 刘乃公. 我国房地产泡沫形成原因研究. 经济论坛.
<8> 李畅. 人民币升值预期导致我国房地产泡沫的实证分析. 商场现代化, 2009(1)
<9> 廖高乐. 浅谈我国近期房地产泡沫的形成原因. 中国经贸导刊, 2009(24)
<10> 王淑梅, 王朝晖. 对我国房地产泡沫现象的研究. 山西建筑, 2009(2): 5
<11> 张丽华, 孙涛. 借鉴日本房地产泡沫, 完善我国房地产市场的发展环境. 南京航天航空大学学报, 2007(3)
<12> 钟立春. 房地产泡沫对我国金融安全的影响及对策. 商业经济, 2009(7)
<13> 毛勇, 余新民, 殷保兵. 对我国房地产市场泡沫的判定及预控机制研究. 城市发展研究,2009: 2
<14> 梁雅磊. 我国房地产市场泡沫经济实证及政策建议. 企业家天地, 2009(6)
<15> 钟春仿. 基于状态空间模型的我国房地产泡沫的测度研究. 高校讲坛, 2008: 16
<16> 彭建林. 基于计量经济模型的房地产价格泡沫研究. 平顶山工学院学报, 2009(1): 1
<17> 国家统计数据库
Appendix: