Capital Inflows and House Prices: Aggregate and Regional Evidence from China

Rising house prices in China have been of concern for investors and policymakers. Prices have risen substantially in the last decade, especially in large urban cities, and some economists have expressed concerns about the affordability of residential housing for young adults. This phenomenon becomes a major concern for policymakers, in terms of managing policies to balance the residential needs of individuals and the transition to a market economy. Theoretically, house prices ought to be linked to economic factors such as disposable income, availability of land to build and credit policy. However, it appears that traditional economic theories fail to appropriately explain house prices in China. We provide an explanation from the perspective of capital inflows into China. In terms of per capita remittances, China receives the highest inflow of foreign capital, and this may have a significant impact on risk adjusted returns in the Chinese market. To investigate this relationship, we use the vector error correction model to assess the impact of capital inflows on house prices. We find that capital inflows have a significant positive effect on house prices. The study makes important contributions to understanding the relationship between house prices and foreign remittances after controlling for other economic factors. China is a large economy. Because the impact of economic development in China has not been consistent across the country, we address the regional differences in the house price changes to capital inflows. Using regional data, we show that capital inflows have an asymmetric effect on the housing market across different provinces and cities of China. This has important implications for the development of economic policies in China that aim to provide fair access to residential housing for everyone. These findings are also relevant to investors in the housing market, whether investing for a personal residential home or as part of their diversified investment portfolio. It will also be informative to see how a reversal of capital inflows associated with tighter financing conditions in advanced countries will affect house prices in China.     

Banking on the FED: QE1-2-3 and the Rebalancing of the Global Economy

Growing income inequality in most countries in the 1990s and 2000s led to a global shortfall between supply and demand. The US economy bridged this shortfall domestically and globally by blowing successive equity market and housing bubbles, but these produced ever more severe financial crises. Rebalancing after the 2008 crisis required trade surplus countries to expand their non-traded sectors, but rebalancing is never immaculate. Instead, the Federal Reserve Bank's three rounds of Large-Scale Asset Purchases, or quantitative easing, shifted investment flows towards some developed and developing economies. As a matter of accounting, capital inflows led to shrinking trade surpluses in those countries. However, their relatively undeveloped securities markets mean that rebalancing largely occurred through rising housing prices, mirroring the same unsustainable phenomenon the USA experienced in the 2000s. In effect, the USA shifted part of its unsustainably large non-traded sector back to trade surplus countries by causing the real-estate part of the non-traded sector in surplus countries to expand. However, this is not a sustainable solution to global trade and financial imbalances in the long run, and risks producing the same kind of crises the USA experienced in 2008.     

Interest Rates,Local Housing Markets and House Price Over‐reactions

Understanding the effects of interest rates on city‐specific house price to household income ratios is important for managing local housing markets. In particular, there is concern that keeping interest rates at sufficiently low levels can distort the relationship between local house prices and fundamentals. We use house price to income ratios across capital cities in Australia to investigate this issue and show that there is a national interest rate ‘transition’ point below which housing dynamics can become unstable. This result lends support to the presence of a duration‐dependent threshold effect (hitherto mainly explored in theoretical models).     

Detecting Imbalances in House Prices: What Goes Up Must Come Down?*

I suggest a toolkit of four bubble‐detection methods that can be used to monitor developments in house prices. These methods are applied to US, Finnish, and Norwegian data. For the United States, all measures unanimously suggest a bubble in the early to mid‐2000s, whereas current US house prices are found to be aligned with economic fundamentals. One of the measures indicates imbalances in Finland, while there are no signs of a bubble in Norway. I find that large parts of the US house price bubble can be explained by the sharp increase in capital inflows and the extension of loans to the subprime mortgage market.     

The Real Story of Housing Prices in Australia from 1970 to 2003

Despite the popular and public policy interest in housing prices, there have been few reliable published data for housing prices in Australia. In this article we aim to provide an authoritative account of prices for houses and apartments (units) in Australia from 1970 to 2003. Where possible we draw on data from land title offices or on studies that draw on these data, but we also draw on supplementary data in some cases. The first part of the article describes the major data sources of Australian house prices. The main body of the article provides our best estimates of median house and unit prices and real price indices in the capital cities and in the rest of Australia along with explanations for their derivations. We also estimate how improvements in housing quality have influenced real house prices.     

ECONOMIC GROWTH AND INCREASING HOUSE PRICES

Abstract.  Several cities and countries in Asia and North America have experienced large increases in housing prices. We extend the 1991 paper by S. Rebelo to simulate this situation. We show that growth in real housing prices can result as economic growth persists, even when population growth is zero. Another finding is that reported increases in housing prices might be underestimated. In particular, the growth rate of a relative price index may converge to zero even when house prices in real terms display sustained growth.     

Fertility and housing

Young households in Hong Kong face particularly steep increases in house prices and low fertility despite low gender wage gaps. The model of fertility and housing in this paper explains why fertility decline need not reverse as female wages rise relative to male wages where housing land is scarce. For given house prices, demand for children may rise with female relative wages if housing comprises a sufficiently large share of childrearing. If the user cost of housing falls with rising house prices then fertility also rises. For endogenous house prices, however, growth in wages and a burgeoning working age population raises the market price of housing. In turn, fertility no longer rises with female relative wages. The analysis provides a novel mechanism whereby high population support ratios depress fertility and the results fit recent evidence that house prices affect fertility.     

Joint Adjustment of House Prices, Stock Prices and Output Towards Short‐run Equilibrium

A dynamic IS‐LM model including houses and stocks as additional assets will be analysed in this paper. Providing also housing services, a major consumption item for most households, houses create an additional link between the monetary and the real sector, distinct from the traditional wealth effect channel. We analyse the adjustment path of output, house prices and stock prices after policy shocks within a rational expectation setup. Depending crucially on the elasticity of housing services demand, different reaction patterns of asset prices will emerge. The results are contrasted with relevant empirical findings, particularly Lastrapes (Journal of Housing Economics, 11 (2002), pp. 40–74), leading to the identification of plausible elasticity ranges. The analysis sheds new light on the ongoing discussion about demand effects from changing real estate wealth and about determinants of house price fluctuations.     

Explaining House Prices in Australia: 1970–2003*

This paper aims to explain changes in real house prices in Australia from 1970 to 2003. We develop and estimate a long-run equilibrium model that shows the real long-run economic determinants of house prices and a short-run asymmetric error correction model to represent house price changes in the short run. We find that, in the long run, real house prices are determined significantly and positively by real disposable income and the consumer price index. They are also determined significantly and negatively by the unemployment rate, real mortgage rates, equity prices and the housing stock. Employing our short-run asymmetric error correction model, we find that there are significant lags in adjustment to equilibrium. When real house prices are rising at more than 2 per cent per annum, the housing market adjusts to equilibrium in approximately four quarters. When real house prices are static or falling, the adjustment process takes six quarters.     

Sudden stops in a currency union – some lessons from the euro area

During the Great Financial Crisis several euro area Member States with current account deficits were subject to sharp reversals of private capital flows. We examine how the specific policy rules of the euro area's payments system TARGET2 affects the macroeconomic adjustments to sudden stops. We find that – in the short run – public capital flows in form of TARGET2 help euro area‐deficit countries to stabilize output, consumption, and investment after a sudden stop of private capital inflows. In the long run, however, euro area countries suffer under a prolonged economic recovery and accumulated large public debt as well as higher welfare losses relative to euro peggers.     

Housing price,talent movement,and innovation output: Evidence from Chinese cities

How housing costs would influence the job‐housing choice of talent and associated city‐level innovation performance is a question of interest for urban development policies. Recently, considerable attention has been paid to the influence of rising housing prices on the attraction of talent and the associated innovation output in major Chinese cities. In this paper, we use the housing price data of 51 cities from the China Real Estate Index System database and the corresponding macro data of China City Statistical Yearbooks from 2005 to 2014 to analyze this focal research question. The empirical analysis shows that the increase in city housing prices generally correlates positively with city innovation outcome and talent attraction, suggesting no crowding‐out effect on the innovative performance of the city. However, the positive association between housing prices and innovation outcome and talent attraction has started to disappear in first‐tier cities in recent years, suggesting potential crowding‐out effect if the increasing housing prices transform to bubbles. This research thus provides considerable policy implications concerning the impacts of housing prices on talent movement and innovation output.     

Tipping the (Im)balance: Capital inflows,financial market structure,and banking crises

An emerging consensus among scholars and policy‐makers identifies foreign capital inflows as one of the primary determinants of banking crises in developed countries. We challenge this view by arguing that external imbalances are destabilizing only when banks face substantial competition from securities markets in the process of financial intermediation. We assemble a dataset of banking crises covering the advanced industrialized countries from 1976 to 2011 and find evidence of a conditional relationship between capital inflows, a well‐developed securities market, and the incidence of banking crises. We further explore the impact of capital inflows on banks’ actual risk taking as indicated by their capital adequacy levels and measures of insolvency risk. Our results demonstrate that prudential capital cushions tend to decline with the combination of capital inflows and prominent securities markets. We highlight the political decisions—often made during the early days of a country's financial development—that determine the relative prominence of banks vs. non‐bank financial institutions and conclude with policy recommendations.     

The effect of monetary policy on real house price growth in South Africa: A factor-augmented vector autoregression (FAVAR) approach

This paper assesses the impact of monetary policy on real house price growth in South Africa using a factor-augmented vector autoregression (FAVAR), estimated using a large data set comprising of 246 quarterly series over the period 1980:01 to 2006:04. The results based on the impulse response functions indicate that, in general, house price inflation responds negatively to monetary policy shock, but the responses are heterogeneous across the middle-, luxury- and affordable-segments of the housing market. The luxury-, large-middle- and medium-middle-segments are found to respond much more than the small-middle- and the affordable-segments of the housing market. More importantly, we find no evidence of the home price puzzle, observed previously by other studies that analyzed house prices using small-scale models. We put this down to the benefit gained from using a large information set.     

THE PECULIAR ECONOMICS OF HOUSING BUBBLES

Home values increase rapidly during housing bubbles generating large capital gains. High loan‐to‐value (LTV) mortgages secured by expected future home values are one way to take advantage of these capital gains. In this article, we use a simple partial equilibrium consumer theory model to explore the implications of high LTV borrowing. We find that sufficiently large expected house price growth leads to an upward‐sloping budget line when households can obtain high LTV mortgages. In this environment, the demand for housing fits neither the conventional theories of consumer goods nor that of investment goods. In fact, increases in the expected future price of housing may reduce current housing demand, whereas decreases in the effective (current) price may lead to households buying smaller homes. Moreover, high LTV loans reduce the effectiveness of monetary policy, but raise the volatility of aggregate demand. Tighter borrowing standards may help lower demand volatility at the expense of shrinking the economy. (JEL E21, R21, E52)     

Is the relationship between monetary policy and house prices asymmetric across bull and bear markets in South Africa? Evidence from a Markov-switching vector autoregressive model

This paper examines asymmetries in the impact of monetary policy on the middle segment of the South African housing market from 1966:M2 to 2011:M12. We use Markov-switching vector autoregressive (MS-VAR) model in which parameters change according to the phase of the housing cycle. The results suggest that monetary policy is not neutral as house price growth decreases substantially with a contractionary monetary policy. We find that the impact of monetary policy is larger in bear regime than in bull regime; indicating the role of information asymmetry in reinforcing the financial constraint of economic agents. As expected, monetary policy reaction to a positive house price shock is found to be stronger in the bull regime. This suggests that the central bank reacts more in bull regime in order to prevent potential crisis related to the subsequent bust in house prices bubbles which are more prominent in bull markets. These results substantiate important asymmetries in the dynamics of house prices in relation to monetary policy, vindicating the advantages of generating regime dependent impulse response functions.     

上市公司、资本虹吸与房价的地区差异

鉴于上市公司与房价地区差异的研究鲜见,文章首次从地区层面寻找上市公司影响房价的微观传导路径.研究发现,上市公司从一级市场上融资、内部人在二级市场上减持均会"虹吸"全国资金,增加当地货币资本,进而正向影响房价,即高融资或高减持地区成为"虹吸方";融资虹吸与减持虹吸对房价的影响存在差异,减持虹吸引起财富集聚,对房价的影响更多地由富裕阶层的购房需求所推动,而融资虹吸带来的财富影响比较分散.地区股票市值与房价呈现螺旋增长关系,在股市上涨期间替代效应占主导地位,两者的增长率负相关;而在下跌期间财富效应占主导地位,两者的增长率正相关.文章从企业层面阐释了房价地区差异的金融成因及路径,并试图厘清股票市场与房价的增长结构,为地区经济的协调发展提供了参考.     

THE ROLE OF HOUSE PRICES IN THE MONETARY TRANSMISSION MECHANISM ACROSS EUROPEAN COUNTRIES

This paper provides a discussion of the ‘housing market’ channels of the monetary transmission mechanism and offers some evidence of institutional differences in the European housing and mortgage markets. Using a number of Vector Autoregressive models, estimated individually for nine European countries over the pre‐EMU period, we find that house prices are significantly affected by interest rate shocks. The relative role of these interest‐rate‐induced fluctuations in house prices for private consumption is then investigated. We show that house prices may enhance the effects of interest rate shocks on consumer spending in those economies where housing and mortgage markets are relatively more developed and competitive.     

Can Anchoring and Loss Aversion Explain the Predictability of Housing Prices?

We offer an explanation of why changes in house price are predictable. We consider a housing market with loss‐averse sellers and anchoring buyers in a dynamic setting. We show that when both cognitive biases are present, changes in house prices are predicted by price dispersion and trade volume. Using a sample of housing transactions in Hong Kong from 1992 to 2006, we find that price dispersion and transaction volume are, indeed, powerful predictors of housing return. For both in and out of sample, the two variables predict as well as conventional predictors such as the real interest rate and real stock return.     

Housing prices and population dynamics in urban China

In this study, a dynamic stochastic general equilibrium (DSGE) model is used to investigate the influence of population on housing price dynamics in urban China. The contribution of population growth to the housing price trend and the contribution of population shocks to housing price fluctuations are quantitatively measured. The empirical results indicate that the ongoing policy to control the population size in large cities in China can decrease the growth rate of housing prices by 0.49% every year, which accounts for 1/10 of the total housing price trend. Furthermore, this policy cannot stabilize housing prices because population shocks have negligible effects on the housing price cycle. Housing technology shocks and housing preference shocks are responsible for most of the housing price fluctuations.     

Credit constraints,inelastic supply,and the housing boom

In this paper, I develop a dynamic general equilibrium model to study the sensitivity of house price changes with respect to credit constraints. I find that house prices are sensitive to changes of the down payment requirements if owner-occupied houses and rental houses are inelastically supplied. I then use the model to evaluate the housing boom during the 1995–2005 time period. I find that, under the assumption that owner-occupied housing and rental housing cannot be converted to each other, the increase in real household income and the decline in down payment requirements can explain a large fraction of the observed house price and price–rent ratio changes during the 1995–2005 time period. However, the model fails to match the interest rate changes during the 1995–2005 period.