The Influence Factor and Current Position of Housing Market in Different Regions of China

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nAbstract

nChina is a large country, which has experienced drastic growth in the housing market. After the country abolished the housing distribution system in the housing sector in 1970s, it formed the foundation of growth in this sector. However, the housing market is affected by regional differences across the country. The eastern, central and western China has a different level of economic growth, which affects the development of the housing market. Moreover, the regions have diverse levels of urbanization, GDP and per capita. For instance, provinces in the eastern regions such as Shanghai have major cities as compared to western regions, which have relatively smaller cities. Due to this factor, people living on the eastern side have higher levels of disposable per capita hence; many are able to purchase new houses as compared to those in central and western China. Furthermore, other factors that influence the housing market in China include the population level, and cost of completed houses. In particular, the eastern region has a large population, which increases the demand of houses in that region. The cost of completed house in the western and central regions also tends to be higher because of higher cost of development. Therefore, the housing market in China is dependent on various factors across the country.

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nIntroduction

nSince the late 1970s, China has initiated reforms in its economy via liberalization of trade, which produced a drastic economic transformation. The Chinese government abolished the housing distribution system, which was based on welfare. Moreover, in 1998, more reforms in housing were implemented. Consequently, the housing sector started to form the foundation of economic growth in China (Wang and Zhang 2014). The country has more commercialized suburban buildings as compared to second-hand structures. Over the past two decades, the housing market in the country has witnessed a revolution due to high rate of commercialization. Moreover, this revolution transformed the way State Owned Enterprises (SOEs) and government allocate houses to the people (Wang, Yang and Liu 2011). More importantly, the housing market was not controlled via demand and supply.

nCurrently, the country has one of the fastest rising economies across the globe. In 2013, its GDP recorded a growth rate of more than 10 per cent. In addition, reports indicated that foreign direct investment (FDI) in China is second biggest in the world economy. The housing sector in the country plays a critical part in the gross domestic product (Wang, Chan and Xu 2012). More than 50 companies in China are associated with the housing industry. For instance, the housing industry has direct association with the financial and construction industries as well as catering and accommodation sector, retail and wholesale industry. Moreover, the housing industry has a direct relationship with other sectors such as manufacturing of equipment used for special purposes and light industry (Wang, Shao, Murie and Cheng 2012). Furthermore, it has a special role in the economy since it provides tax revenues and employment.

nThe prices of housing in China have recorded a drastic increase in different regions of the country. Reports indicated that different regions experience varying levels of change in the housing sector because of the high rate of urbanization, faster growth of economy and GDP, policies initiated by the government, housing speculation and huge local demand (Zhang and Morley 2014). However, Chinese has experienced challenges in this sector because the price of housing is increasing at a faster rate as compared to increase of income of households and growth of both regional and national economies. The housing sector is very crucial for household investments because it affects the quality of life and living conditions for an individual (Wang 2011). However, it can cause a recession in the economy because of price fluctuation in the market.

nHousing market normally involves the land, infrastructure construction and development, natural resources such as minerals and water, and properties associated with housing and land. More specifically, the housing market deals with renting, selling and buying real property (Yi and Huang 2014). In this respect, it features both the land price and house prices. Residential buildings include costs of land, installation and constructions. Moreover, it involves costs such as financial, project management, taxes, advertisements and sales. Therefore, a wide range of factors influences the housing market in China (Wang, Yang and Liu 2011). In this regard, factors such as inflation rates, interest rate, economic condition, level of urbanization, revenue and taxes, and land policies.

nThe differences of the Chinese regions such as Eastern, Western and Central areas also affect the housing market. Economic development and growth is different in major areas in the country (Wu, Deng and Liu 2014). The eastern region is characterized by the high level of urbanization, which has provinces such as Shanghai, Guangzhou and Beijing. On the other hand, Eastern and Central China are characterized by lower level of economic growth in areas such as Urumqi and Wuhan (Goodman 2013). Additionally, the level of urbanization in these regions is lower as compared to Eastern regions. Due to this fact, there are huge disparities in terms of development of the housing market in the country. From 1998 to the time of economic recession in 2008-09, the housing market was growing faster in Eastern regions in China such as Shanghai (Song and Zenou 2012). Conversely, in the same period, regions in western and central China witnessed a slower level of growth. The unbalanced transformation of the economy in these regions affects the growth of the housing market (Wang 2011). More significantly, housing market requires huge amount of capital which depends on the regional land policies, taxes, economy, supply and demand. The western, central and eastern regions in China have diverse characteristics, which affect the level of development of the housing market (Wang and Zhang 2014). In this case, the housing market in central and Western regions in China is still immature and in its infancy contrary to that in Eastern areas which is characterized by major investments (Yi and Huang 2014).

nHypothesis

nThere is a significant association between economic factors in different regions in China and the housing market

nThere is a significant association between social factors in different regions in China and the housing market

nThere is a significant association between demand and supply factors and housing market in different regions in China

nSpecific Objectives

nTo determine the economic factors that affect the current position of the housing market in different regions of China

nTo determine the social factors that affect the current position of the housing market in different regions in China

nTo determine the demand and supply factors that influence the housing market in different regions of China

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nLiterature Review

nLocal scientists conducted various studies on a wide range of factors that influence the housing market in different regions in China. Nonetheless, the majority of Chinese scholars did not utilize the approach of regional analysis to determine factors that influence the prices of houses across the country. In this regard, many studies failed to incorporate the regional characteristics since analyzed factors represent macro-indicators.

nLevel of regional economic factors

nVarious studies also applied regression analysis to determine the factors that influence differences in the regional real estate market in China. The eastern China consists of provinces such as Shanghai, Beijing, Hainan, Guangdong, Shandong, Fujian, Tianjin and Zhejiang. The Western China consist provinces such as Guangxi, Xinjiang, Ningxia, Tibet, Yunnan and Sichuan (Zhang and Morley 2014). On the other hand, Central region has provinces such as Hunan, Jiangxi, Anhui, Inner Mongolia and Shanxi. The study noted that the eastern region is characterized by high levels of increase in the prices of houses due to huge investments in residential development (Mak, Choy and Ho 2012). On the other hand, the housing market in the western China is at early stages of development as compared to the eastern region (Wang, Chan and Xu 2012). The research noted that approximately 59 per cent of total investment in real estates is found in the eastern China in 2010. Conversely, the total investments in residential houses in the western region are 17 percent during the same period. More significantly, this means that eastern region is 3.53 times higher in investments as compared to western China (Chen, Guo and Wu 2011). Furthermore, according to a research conducted by Huang (2012), the eastern China contributes close to 53 per cent of the total construction sites in China while the western region accounts for just 24 per cent. In this respect, the study noted that the construction area is 2.17 higher in eastern region relative to western region (Huang 2012).

nChina is an enormous country in terms of land mass; hence, there are huge differences in geographic condition and economic development across the region. Consequently the prices of commercial residences across the regions differ significantly (Wang, Shao, Murie and Cheng 2012). For instance, the figures from the National Statistical Bureau noted that the prices of housing had a dispersion coefficient of 0.6 nationally in 2008. However, regionally, the eastern China has a dispersion coefficient in prices of housing at 0.498. Moreover, the western and central regions in China had deviation coefficients of 0.17 and 0.13 in real estate pricing (Goodman 2013). Through this analysis, it demonstrates that the housing market in China has significant differences based on the region. In particular, the eastern China has the largest difference of 0.498 as compared other regions in the country in terms of real estate prices. In this respect, western and eastern China had the limited differences of 0.17 and 0.13 in terms of prices of housing. Therefore, it is important to develop effective factors in Chinese sub-regions to regulate the housing market based on distinct regional characteristics (Wu, Deng and Liu 2014).

nA survey by Song and Zenou (2012) analyzed the number of completed housing regions in China. The findings of this study concluded that the eastern China accounted for more than 54 per cent of all completed houses in China relative to western area, which had 22 per cent (Song and Zenou 2012). Additionally, the level of completed houses in western and central China is nearly the same. More significantly, the study pointed that prices of houses are more likely to rise at a higher rate in both western and central regions as compared to eastern region (Wang, Shao, Murie and Cheng 2012).

nThe prices of housing can decline when the number of sales increases based on the economic regulations. For instance, for clients doing house investment prices are likely to have preference margins, especially in-group buying (Wu, Gyourko and Deng 2012). Additionally, during the global economic recession in 2008-9, the housing market was at a stalemate, which is normally resolved via reduction in prices, especially among the housing investors and developers (Wang, Yang and Liu 2011). The housing market in eastern China is also characterized by the huge cost of managing business. Therefore, reduction of sales is normally applied aiming to reduce tight money pressures. It also helps to increase return on capital (Wang, Shao, Murie and Cheng 2012). The reduction of sales in the western China is certainly lower than that in the eastern region. In this regard, the impact of the volume of sales on the western China is of smaller margin sales as compared to the eastern region (Wu, Gyourko and Deng 2012). Another study conducted by Zhang and Morley (2014), indicated that factors affecting the prices of housing in the country include the number of housing companies in that region and housing investment (Zhang and Morley 2014).

nDemand and supply determinants

nDisposable Per capita

nIn addition, the study noted that factors such as urban development region per capita and income per capita in residential area affect the housing market in eastern, western and central regions in China (Wu, Gyourko and Deng 2012). The study highlighted that regional differences in China are affected by disposable income per capita (DIPC). Wang, Yang and Liu (2011) applied the analysis of gray correlation to explore the factors that affect the prices of housing. The study noted disposable income play a major role in determining the prices of housing in China (Wang, Yang and Liu 2011). Various factors such as government policy, distribution of income and macroeconomic factors affect the income (Wang, Chan and Xu 2012). Similarly, per capita income affects the consumer purchasing capacity. In this regard, persons with huge disposable income have a greater ability and power to purchase houses hence promoting the market. Since 1979, the disposable income in the country has risen drastically which has led to increase in the prices of houses. According to a research by Wang (2011), China has varied levels of disposable income depending on the regional differences. In this respect, the urban centers in eastern China have higher per capita as compared to the western or central region. Therefore, the demand for houses is likely to be higher in this region as people need quality houses, better living environment and other infrastructure (Wang 2011). On the other hand, the prices of housing are normally higher in the eastern region because of higher cost of construction.

nMoreover, a study by Wang, Shao, Murie and Cheng (2012) only indicated the differences in index of various markets in the region especially in the housing market. However, the study failed to explore the level at which these indexes affected the prices of housing (Wang, Shao, Murie and Cheng 2012). According to Goodman (2013), both short-term and long-term fluctuations of prices largely affect the scale of credit to the western and eastern. However, short-term and long-term fluctuation of price is relatively lower in central areas in China (Goodman 2013). Consequently, this indicated that the policy on credit executed by the government on the control of the prices of housing in the western and eastern regions is more effective. On the contrary, credit policy executed in the central China is less effective in controlling prices of housing. Furthermore, the rates of interests in real estate have similar impacts on Western, Eastern and Central regions.

nThe gross domestic product per capita has a huge effect on the central China in both the short and long term (Wang, Chan and Xu 2012). In this respect, it shows that the development of the housing market in central China is highly reliant on the economic development of that region. According to a study by Wu, Deng and Liu (2014), the anticipated variety of prices of real estate in the eastern China have higher effects on the price influence on short-term basis (Wu, Deng and Liu 2014). Moreover, Yi and Huang (2014) study revealed out that the demand of the housing market in China has substantial differences across the regions. The research concentrates on the effect of the urban development and housing industry conditions on the prices of housing (Yi and Huang 2014).

nGDP

nGross domestic Product is the financial worth of all services and goods produced in a specific period in a country annually. It demonstrates the condition of the economy in a nation as well as the living quality of its citizens. The GDP affects the prices of houses in the economy (Yeh, Xu and Liu 2011). For instance, the GDP growth plays a crucial role in the enhancement of economic status and living conditions of the people. Therefore, the rate of consumption can be enhanced for persons who have a high level of purchasing power which improve the housing market. Furthermore, the population in urban areas increases as their economic status improves, leading to higher demand of housing (Wang and Zhang 2014). More importantly, the improvement of GDP trends reinforces the confidence of developers of real estate in the housing market as well as the macro-economic environment. Huang (2012) argued that GDP plays a huge role in the development of the housing market in China. In this respect, the GDP in various regions in the country is normally different. For instance, the eastern region has relatively higher GDP as compared to other regions. In this regard, the higher rate of advancement of the real estate market in the eastern China is normally affected or promoted by GDP (Huang 2012).

nCost of Complete House

nFurthermore, the cost of complete house differs across the regions in China. The housing market in central China is normally affected by cost of complete houses since it plays a critical part in the prices of houses. A study by Yue, Liu and Fan (2013) concluded that this factor is more substantial in central China because the region has bigger second to third cities ration in China. Moreover, the study noted that the number of cities and municipalities in eastern region is 40 more than that in the central region (Yue, Liu and Fan 2013). However, central China has a lower level of economic development than the eastern China, which leads to larger ration in the cost of completed house in the prices of real estates (Wang, Chan and Xu 2012). Moreover, the study pointed out that some cities in the central area, the percentage of cost of completed property is 61 per cent higher than that of the eastern region. Therefore, the study concluded that in the regions where there is a higher rate of economic development, the cost of construction is normally lower and its effect on the prices of houses is much smaller as compared to less developed areas (Mak, Choy and Ho 2012).

nSocial factors

nUrbanization

nA study by Mak, Choy and Ho (2012) indicated that the effect of urbanization rate on the housing price also depends on the regional differences. The rate of urbanization in the western China is lower than that of the eastern region. Consequently, the prices of housing in the eastern China are normally influenced by the rate of urbanization (Mak, Choy and Ho 2012). A study conducted by Mak, Choy and Ho (2012) revealed that the housing market in China is affected by the level of urbanization. In addition, the study pointed out that the economic level of growth in the country affects the real estate market, especially the housing prices (Mak, Choy and Ho 2012). Moreover, the rate of urbanization is also higher in central region relative to that of the western region. Since the economic development and foundation in the western and central region are weak and the level of the housing market is not developed, their needs for economic development should be reinforced aiming to balance the level of development with other regions. Therefore, the effects of rate of urbanization in the central and western China are normally lower as compared to that of the east (Wang, Shao, Murie and Cheng 2012).

nThe population

nThe aim of development of the housing market is to meet the demand of an increasing population in the economy. Therefore, the relationship between prices of houses and the population exist. China started the one-child policy, which has affected the structure of the family leading to smaller families (Barth, Lea and Li 2012). On the other hand, smaller families have led to increase in the per capita. Similarly, it forms the foundation for the rise in the demand of better housing causing prices of houses to increase (Zhang and Zou 2012). The population of urban centers play a crucial role in determining the effects of the housing market in China. Different regions have diverse levels of population growth. In western China, the population in urban areas is approximately 21 per cent of the total population in China urban centers (Yeh, Xu and Liu 2011). Consequently, there is inadequate demand for real estate. In this respect, if the demand reduces, sales are likely to decrease with the prices of residential houses increasing and the vice versa. Research by Song and Zenou (2012) noted that the western China lacks conducive environment to facilitate development of the housing market. Ultimately, a few cities directly cause inadequate demand in urban housing (Song and Zenou 2012).

nIn other words, the western, central and eastern China has differences in terms of rate of urbanization and economic growth. Therefore, each region has diverse factors that influence the housing market. For instance, the housing market in different regions is affected by per capita income, economic growth, population, urbanization, GDP, sales and cost of complete house (Wu, Gyourko and Deng 2012). However, since China introduced reforms in the housing sector, it has witnessed a rise in the demand for better housing. Moreover, policies such as one-child policy have led to increase in per capita per in a family. Therefore, the demand for quality living standards such as quality housing has increased.

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