Chapter 4: Does local governments’ budget drive housing prices up in China? . 45

4.6 Conclusion remarks

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72 Sex ratio

Wei and Zhang (2011) and Wei et al. (2012) propose that, in China, households with a son or the bachelors tends to buy a house in order to get a stronger competitive position in the marriage market, therefore, the sex ratio imbalance is contributed to China’s soaring house prices. The argument is consistent with the empirical result of Wu and Li (2015). Our empirical result suggests the effect of sex ratio (0.552 and 1.363) on China’s housing market is positive and is statistically significant under the regime that housing price growth rate is relative high (see column (4-6-3) and column (4-7-5)), which implies that owning a house makes a man more attractive and also gets a stronger competitive position in marriage market when there is a massive increase in house prices.

4.6 Conclusion remarks

This Chapter bases on a panel smooth threshold regression to take a fresh look at the possible heterogeneous responds that the housing market participants may have along the housing cycle. This study confirms that both economic fundamentals and other important factors have asymmetrical impacts under different housing growth rate. The empirical result also shows that the basic demand side factors such as government expenditure on education per student, disposable income and population have stronger impact on housing market under lower housing price inflation regime. Additionally, result from whole sample suggests that interest rate has significantly effect on housing prices under lower housing price growth rate regime. Given that local government has relied on the revenue from the sale of land use rights. We also consider the relationship between local governments’ budget deficit and housing prices, the estimation result reveals that the impact of budget deficit ratio to housing prices may not necessarily be

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positive. Finally, sex ratio imbalance is contributed to China’s soaring house prices under the regime that housing price growth rate is relative high.

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Chapter 5: Conclusion

Recently, various authors have examined the relationship between China’s housing prices and economic fundamental factors. In most cases, the authors permit only a monotonic relationship. This thesis covers three issues related to examine nonlinear relationship between housing dynamics and economic factors during the different phases of real estate cycle.

In Chapter 2 and Chapter 3, we apply the Markov switching model in our analysis of China’s real estate cycle. Chapter 1 employs economic leading and coincident indicator as well as their multiple components in evaluating the asymmetric impact of economic fundamental factors on real estate market over the real estate cycle for China. Our empirical findings show the dynamic behavior of real estate market is different between contraction and expansion with reaction to changes of economic indicator being more sensitive in contraction than in expansion.

Chapter 3 highlights the possible presence of multiple regimes in the real estate cycle.

Our empirical result suggests that the housing market will smoothly turn to the stable state when it exists a deep recession or a prosperity. Similar to Chapter 2, empirical results of Chapter 3 indicates the expansion state is the most persistent regime in China’s housing market.

Though Chapter 2 and Chapter 3 provide a detailed examination of the impact of macroeconomic fluctuations on the housing market, we do not take the possible endogeneity in the relationship between macroeconomic dynamic and housing prices into account. Some studies point out that the performance of economy plays an

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important role in the housing market, while some studies suggest the fluctuation of housing market could affect the macroeconomy. Therefore, the further research could use a Markov switching vector autoregressive model to examine this inter-relationship for China’s real estate cycle.

The main purpose of Chapter 5 is to study the non-linear relationship between housing price and some basic economic fundamental factors at national as well as regional level.

Besides, we also investigate whether the local government’s budget is an important factors of the housing market. Applying a panel smooth threshold approach proposed by Gonzàlez et al. (2005), our analysis confirms the significance of the nonlinear relationship between the housing price and economic fundamental factors in China’s housing market. Additionally, we find the evidence that conditional on the housing price growth rate is relative low, local government’s budget deficit has negative impact on housing prices at national level.

The main findings in Chapter 4 may also apply to other countries, in particular those remain controversy about the relationship between economic fundamental factors and housing prices. However, there is still some room for further improvement. In this Chapter, we did not apply a structure form but did directly conduct a reduced form and apply the PSTR model to do empirical study. As a consequence, we ignore potential endogeneity between the explanatory variables. Ignoring such endogeneity may lead to some problems. The future study can be conducted using a panel threshold model with endogeneity to improve the efficiency of empirical results.

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