The Property Market and the Macroeconomy of the Mainland: A Cross Region Study

This paper studies the nexus between the property market and the macroeconomy of Mainland China in 1998-2004. Panel data models are employed, using statistics for 31 provinces and major cities. Empirical analysis suggests a two-way linkage between GDP and property price growth. In particular, changes in property prices affect GDP growth mainly through the investment channel. Property price inflation in recent years is found to have had a significant and positive effect on growth in fixed asset investment, particularly real estate investment. By contrast, no evidence of a wealth effect on consumption spending is found. This is possibly because a large number of households have not benefited from house price appreciation. Moreover, households have limited means to withdraw housing equity to finance current consumption. Bank credit expansion did not seem to play an 'accelerating' role in property price inflation, although the latter is found to have contributed to bank credit increase in recent years. Property price growth may have deviated from fundamentals in coastal areas, as evidenced by a negative relationship between housing and rental prices.