Analysis on the impact of the fluctuation of real estate market on China’s macro—economy

Abstract：All along， the real estate has played a very important role in China's national economy， especially in recent years， the real estate market fluctuated greatly with the sharp increase in the urban population which has caused widespread concern in various sectors. Fluctuations in the real estate market not only affect our national housing supply and demand， but also have a certain effect to the development of its related industries， and have a significant impact on China's macro economy. Therefore， the analysis of the impact of fluctuation of the real estate market on social macroeconomic is very important to China's economic development. This paper will analyze the impact of market volatility on China's macro economy in three aspects including the total social consumption， economic growth and inflation so as to regulate the local real estate market fluctuations and drive China’s macroeconomic development.

Key words：Chinese real estate； Market volatility； Macroeconomic； Influence； Analysis

According to the actual situation in our country， the real estate has been developing smoothly as it is an integral part of lifestyle products under the background of the gradual expansion of urbanization. Its development has reached a peak and has became an important part of our country’s market economy. However， the marketization of real estate is not regular enough during its rapid development. The real estate has certain economic operation risk and operational errors so that the market volatility have a great impact on China's macro-economy. Therefore， how to avoid the impact to macro-economy by controlling the market volatility of real estate is an urgent problem to be solved.

1. The macro regulation history of real estate in China

China's central government has publicly stressed： \"economic growth， price stability， full employment， balance of international payments\"， and it has become the primary target of China’s economic regulation of which economic growth ranked in the first place. Therefore， in China's economic development， real estate market fluctuations are required to adapt to macro-economic growth. The macro-economic control of real estate is of great significance to social and economic development. Since 1998， China's real estate market regulation can be divided into the following three stages：

The first stage is from 1998 to June in 2003， during this period， China's central government issued preferential policy such as tax relief and interest rate to encourage housing consumption， which had effectively promoted the development of China's real estate market， making it jump to another level in social and economic development. In 1997， the Asian financial crisis erupted which led to China’s economy depression for a period of time. In order to stimulate domestic demand， the Chinese government promulgated a series of policies and regulations to make corresponding regulation on macro-economy so as to promote the economic growth and enable the real estate industry to have a great further development. [1]

From June 2003 to the first half of 2008， the development of China's real estate market had been in a rising trend during this period. China's central government made greater efforts in all aspects such as the rate of down payments， interest rates and tax revenue and had promulgated relevant specific policies in order to avoid the emergence of economic bubbles.

From the second half of 2008 up to now is third stage that the Chinese government has regulation of the real estate industry. During this period， the regulation efforts of the Chinese government become smaller gradually， and strongly encourage people to buy a house by promulgating relevant policies such as loan interest rates and tax. In the second half of 2008， the Chinese government regulated a series of policies encouraging people to purchase a house in order to avoid the adverse effects on China's real estate market from the sub-prime crisis in the United States . These policies greatly promoted the development of China's real estate market.

With the above regulation policy， the government's goal has always been making the real estate market development able to adapt to the development of the macro-economy so as to promote the stable and sustainable development of the economy. For example， when the fluctuations of the real estate market is rising too fast， the government will issue policies to restrain the fluctuation trend so to avoid spread； when the development of the real estate industry is in depression， the government will come up with relevant policies to encourage people to purchase so asto mobilize the development of real estate market economy.

2. The positive impact of the real estate market fluctuation on the macro-economy

（1） Promote Employment

Real estate industry as a inseparable field of construction industry needs more labor. A large number of builders are especially needed in the early running process while most of the builders are migrant workers. Therefore， the large market demand in the prosperous period of the real estate industry solved part of the rural employment problems in a certain extent and greatly improved China's rural employment. Relevant survey shows that one of the largest projects of the SOHO project needs about 6000 migrant workers. The rising volatility of China's real estate market has mitigative effects on the problem of employment of peasants and promotes the development of the national economy.

（2） Promote the development of real estate and related industries

When the fluctuations in the real estate market is stable， the market can promote the development of its related industries along with its own development. In this period， the rise in the value of the real estate market would attract more enterprises to increase investment so that the supply of real estate market is greatly increased， and finally the rapid development of the real estate market is promoted. At the same time， as the real estate industry has a strong correlation with other industries， its development also promotes the development of its related industries to a certain extent. According to relevant survey， if the demand for real estate increases 100 Yuan， the demand for other industry would increase to 215 yuan， its impact on China's macro economy is 315 yuan with a combination of the capital requirements of all industries. It shows that the real estate industry is extensively involved in many fields [2]. By analyzing the data， we realize that the moderate growth of the demand in real estate industry has a great promotion in China's overall economic development.

（3） It is conducive to the recovery of bank accounts

When the fluctuation of the real estate market is on a stable rise， it also has certain guaranteeing effect to the loan security of the banking system， which is mainly reflected in two aspects. First， the bank can allay fears about \"bad debt\" because the value of collateral is increasing with a better cashability. On the other hand， real estate developers’s loan interest could promote the development of banks and drive the collection of receivable at the same time[3].

（4） Promote domestic demand

When the real estate market is in recession， the price will drop moderately. In accordance with international practice of house price to income ratio， the proportion housing price accounts for in national consumer spending would reduce correspondingly， and national spending in other areas such as tourism， catering， car and household electrical appliances will increase in contrast. When these consumption expenditure increases， the profits of the manufacturers will increase too which will promote workers’s consumption by improving their salary and wage. As demand would driven development， when these industries get high profits， they would increase the investment in technological innovation to improve the industrial development， optimize the industrial operation structure so as to promote the sustainable development in China's market.

（5） Provide the homebuyers with better welfare

When the real estate market is declining， the dropped housing prices will give more people the opportunity to improve the living environment， so that they can purchase a better living place with a lower price. On the other hand， it will make the low income class be able to buy a house by converting ineffective demand that lack the ability to pay to effective demand so that people's living standards can be improved to a certain extent. In addition， the moderate decline in the real estate market contributes greatly to the increase of the real estate transaction volume. To some degree， it promotes the development of the real estate industry and also plays a important role in improving the living standards for the people.

3. The negative impact of the real estate market fluctuation on macro-economy

（1） Causing asset bubbles

When the real estate market fluctuates rapidly， it will exerts negative effects to China's economic development. First， real estate developers and buyers will have a subjective expectation of the future development of real estate market and then they will take some collective speculation actions according to their expected results. Their behavior make the development of the market value of the real estate far in excess the basic values decided by market base and lead to the steady rising trend of the real estate market. Under the influence of this background， more and more people joined the team of real estate speculator which has improved the incidence of speculation and resulted in the asset bubble in the real estate industry， and the virtual value of real estate deviates from its price seriously. In addition， as the real estate industry has a high degree of association of other relevant industries， when the real estate industry is rising and lead to overheat， other related industries will be involved inevitably at the same time. This will pull the supply of management industry and the requirement of related industries， which will cause the overheating of the whole economy and resultin the asset bubble in China’s market economy[4].

（2） The damage to the development of the real economy

The impact brought by excessive rise in the real estate market to real economy industry is mainly reflected in two aspects： On the one hand， the excessive high prices of real estate market will cause the insufficient domestic demand and produce some negative factors to the consumption of other industries， thus present a barrier to the development of the real economy such as manufacturing industries. On the other hand， the \"overheating\" of the real estate market will produce great profit by absorbing the financial resources of other real economy industries， and the development and the normal operation of other industries would suffer a very big impact. Based on the above-mentioned factors， it can be found that the overheating of the real estate market will absorb a large number of social resources， so skew will appear in the allocation of resources and the development of some real economy will be inhibited greatly.

（3） Cause insufficient domestic demand

There are many problems in the development of the market economy in China， the insufficient domestic demand is one of the biggest problems. The root causes have inseparable relationship with the \"overheating\" development of the real estate market which leads to the rapid rise in prices of real estate. Some families greatly reduce their consumption in other areas in order to accumulate housing costs which casue \"insufficient domestic demand\". It has brought great negative effects to the overall development of China's economy.

（4） The impact on the real estate industry

When the value of the real estate market decline sharply， it will have a negative impact on its own development and break the balance of housing supply in China. The real estate industry plays an important role in China’s market economy， the government realize the management and control of the market behavior through the supervision and management of it. In the current real estate industry， some developers have a lot of problems in the process of development. In this case， the government should promulgate some policies to carry on the correct guidance to ensure healthy development of the industry， instead of taking extreme administrative \"curb\" behavior which will make the situation even worse and is not conducive to the development of the real estate industry. Therefore， when the real estate market fluctuations is in a downward trend， the low market would reduce the supply of housing and may lead to the bankrupt of some real estate suppliers， thereby forming a vicious circle.

（5） The impact on the banking system

In China’s current real estate market， 80% of China's land acquisition and real estate development financed from bank credit and 90% of the purchase is based on mortgage loan by individual. So when the real estate market is in a a sharp decline trend， the rapidly decreased prices will have a huge impact on the banking system. The chairman of China Construction Bank spoke publicly in 2008 about the relevance between the contraction in real estate market and the banking system security：\"when house prices fell by 10%， it has no influence on me； when prices fell by 20%， it will produce certain negative effect； when prices fell by more than 30%， it will have a greater negative impact on me.\" [5] So when the real estate market is in a sharp rising trend， the safety of the banking system will be impacted and the financial risk will continue to increase. When the real estate market once have the sharp decline， the real estate market would have a oversupply situation， the mortgage value will shrunk and lose the corresponding realization ability so that the incidence rate of bad debts and other risks will rise rapidly. At the same time， many customers of real estate industry have to break the contract because of financial matter and the banks would face of a large number of default along with certain obstacles in the flow of funds， which greatly affected the normal operation and development of bank.

（6） The impact on the development of other industries

Due to the long chain and the obvious leading role of real estate industry， it is inevitable that the development and operation of other industries will be impacted under the situation that the market is in a steadily dropping. On the one hand， the industries that have relation with real estate industry is broad， there are so manyemployment and staff. Once the real estate market declined， these people will face the unemployment crisis. The substantial increase in the unemployed will inevitably have a certain pressure and negative effects on the development of the society. On the other hand， the demand of industry will also increase accordingly under the situation that the early development of the real estate market is good. These production industry will greatly increase the investment in the fixed assets in order to meet the needs of the market. In this context， once the real estate market declined， the problems of excess production would occur.

（7） The impact on economic development

Since the 20th century， China's real estate industry has a rapid development and progress from recovery to initial development， rapid development， and today’s stable development. The developing speed is so fast that is about two times faster than the average growth rate of China’s economy. According to related research shows that the comprehensive contribution rate of the total investment funds of real estate market for China's GDP growth reached 22.5% between 1997 to 2005. In this case， the impact on China's GDP is obvious if the real estate market fluctuates with a declining trend. Therefore， the fluctuation of the real estate market has a great impact on the development of China's economy.

4. The corresponding control measures for the fluctuations China's real estate economic

（1） Regulate the order of the real estate industry

To control the fluctuation of the real estate market should proceed from the fundamental part， the order of the real estate industry should be regulated as much as possible in the first place. Fluctuations in real estate caused by itself in the process of operation are unavoidable and the non rational factors are unpredictable. But the fluctuation caused by non economic factors can be artificially controlled. For example， the leakage left by ideal design can be corrected and remedied through a certain way. So specification of the order and operation of the real estate market can make the operation gradually standardized and reduce the volatility. Only in this way can avoid the impact of fluctuation to social macroeconomic.

（2） Weaken the real estate market interconnected system

In the whole market economy， some not suitable interconnected system in real estate market result in the wide influence of fluctuation. Of course， some stable features in the real estate market also has a great effect resulting in the pattern being bound together for good or ill. In today’s social market， most of the real estate industry has a inextricably link with banking and also implicated in some virtual economy at the same time which make itself more stable. However， there are both advantages and disadvantages， this interconnected system also increases the risks to the whole economy greatly. Based on this point of view， it is necessary to weaken theuse of financial and interconnected system of the real estate market to ensure the reduction of the overall economic situation risk as well as the scope of vibration and finally promote its normal development.

（3） Develop new investment channels

There are so few investment channels and narrow investment environment in many real estate markets. The real estate market， a industry of necessities with its stability and fixation efficiency， has a certain amount of profit at any time so it has became a hot investment. However， this situation is difficult to maintain for too long with such an unreasonable heat. Any problem will bring huge risks to the investment industry. Even if there is no risk， the economic development of the market is notenough for the standard and it is it is difficult to predict the situation correctly. Therefore， it's essential and urgent to expand the investment channels which can greatly improve the investment security and disperse investment pressure and truly carry out diverted work and bring down the overheating[6].

（4） Increase the construction of low-rent housing and affordable housing

China's housing has not increased with the increasing population， but the prices of real estate market are \"soaring\". It is essential for the government to increase the construction of low-rent housing and affordable housing to meet the low-income people’s needs in terms of housing. And in the development， distribution and adjustment of some commercial housing， the government can issue price regulationpolicies to have control on it.

In addition， the relevant government departments can have regulation in the the development of commercial housing market. On the one hand， the government should strengthen the audit and management of the real estate and implement seriously in accordance with the relevant rules and regulations. On the other hand， the government should increase the construction of low-rent housing and affordable housing and formulate relevant policies so that the housing problem of low-income families can be effectively resolved.

（5） Strengthen the regulation of land

China has implemented the \"Tenders， Auction， Listing\" policy since 2004. Relevant policies should be made to strengthen the adjustment power according to the influence of the supply and demand of the market to the real estate market and land market. Such as analyzing the usage of the idle land， inefficient land and illegal land and clean up some bad situation effectively. Take back the idle land and hoarding land orcollect corresponding high idle tax are conducive to the intensive and efficient use of land. It also has a certain impact in promoting the stability of the real estate market. Regulation of land is inevitable in the development of the real estate market. According to the development of the real estate market， regulating the land， strengthen the actual market supply and greatly increasing the land use rate are conducive way to improve the stability of the market and price so as to effectively reduce the economic influence brought by real estate market to China's social macro- economic.

5. Conclusion

To sum up， we can find that the influence brought by fluctuations in real estate market to social macro-economy development has a close relationship with the factors such as characteristics， connotation and current economic structure of the market itself. It can be said is the inevitable outcome of the economic structure. In order to reduce the impact of real estate on macro economy， we should standardize the order of the real estate industry， weaken its interconnected system in the market， expand the area of investment and opening up new investment channels according to the economic environment and characteristics so as to reduce fluctuation and the influence to dispersed the investment pressure， minimize the impact of fluctuations in the real estate market on macro economy thus promote the standardization of the real estate mark and sustainable development of social macro-economy.