What pushes up China's real estate price?

China's real estate market is rampantly expanding. The purpose of this paper is to examine the factors underpinning China's real estate price escalation from 1998 to 2009.

Cointegration approach, vector error correction model and Granger causality test are adopted to analyze whether stable and long‐run equilibrium interactions exist between housing prices and key macroeconomic variables, such as CPI, land sale and GDP.

Cointegration analysis shows long‐term equilibrium between real estate price (HP) and CPI or GDP, but not land sale. A bilateral Granger causality is observed between CPI and HP. However, GDP does not Granger cause HP, indicating personal gain (disposable income) does not catch up with national gain (GDP) in China, or “Guojinmintui” (national gain outpaces personal gain). Neither is there a feedback effect from HP to GDP, indicating housing price appreciation does not result in immediate capital gain or speculations in housing purchase. Besides, lack of cointegration relationships between HP and land sale is probably caused by restrictive polices on land supply.

This paper represents the first attempt to adopt cointegration approach and Granger causality tests to examine the real estate price escalation in China using national monthly data. Econometric analysis and subsequent policy discussion suggest that real estate price is driven by both economic and institutional factors. In particular, “Guojinmintui” is a fiscal issue while capital gain is a monetary issue. Together with land market policies, these institutional factors significantly contribute to the price escalation.