Download Research on Real Estate Bubble and Its Speculation

Research on Real Estate Bubble and Its Speculation
Cui Dong-hong
Meng Na
College of Management, Shenyang University of Technology P.R. China 110023
Abstract: The principle of real estate foam formation is: the real speculation price forms real estate
foam, and speculation price is the speculative behavior that anticipate a rising real estate requirement
price to form idle fund bloc, adding to governable revenue loan interest rate and the net growth rate of
past real estate prices namely the result which speculation degrees effect together. On the base of
formation theory describing real estate traders’ speculative behaviors, establish real estate speculation
degree checked model. We can compute regions or nations’ the real estate speculation degree through
real estate speculation degree checked model. Government decides whether to adopt to steps or not
according to the speculation degree sizes, and restrains or precautions real estate foam to occur.
Keywords: Real estate foam, Speculative behavior, Speculation degree.
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1 Introduction
Though we could glorify the past real estate, today’s real estate’s modes of life and relation to its
environment sight make us cannot feel relieved for its future. Because entire country economy or
locality economy is held under duress by real estate industry .The future of the real estate always makes
us worried. From 7.7% to 10.4%, then to 13.4%: The nation statistics department announced about
“business index” for building price quarter of 2004, which causes Chinese common to feel fiercely that
the house property as durable good is far to their consume aim. The building price soars rapidly to make
citizen to blur their large and true requirement for house property, make common people produce a kind
of expectation that from the need for house property to “demand”, then from “demand” to “fancy”. If
the expectation comes true, the day that Chinese real estate foam breaking is coming. The consequence
is disastrous to entire national economy. From 1923 to 1926, the real estate speculation violent
radicalism in the Florida of America leads to real estate foam, finally leads to the global economic great
crisis of leader of America in 1930s. In the early of 1990s broken Japanese real estate foam, causes
Japan economy not to leave from the shadow of the “foam” up to now; from 1992 to 1993, in Hainan
take place the real estate and cause about eighty thousands millions’ doubtful account to bank; In 1997,
the cause of Asian financial crisis is also real estate foam. So what cause real estate? What is the
principle of real estate foam formation? Therefore, find out the principle of real estate foam formation is
rather significant to precaution real estate foam effectively.
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Text
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In The New Palgrave: A Dictionary of Economics
the foam for economic meaning is defined a kind
of assets or a series asset price, and it soars rapidly in a successive course, raising price at the beginning
make people to produce a expiation that the price will further soar, and attract new buyers who are the
speculator by business asset seeking interests generally. They aren’t interest in applying asset and asset
earning ability. As the price soars, expecting price always turns or slumps, leading to financial crisis.
Then, what is the real estate foam? Real estate foam is that owing to real estate speculation factor arouse
real estate price to divorce from market bases and rise continuously, namely land and house price, is
very high, don’t correspond with its value in use--market basic value. Though the value in surface
increases very high, in fact it’s hard to realize, becoming a superficially flourishing on the surface.
Because real estate is constituted by land and annexe, and the building is labor product, whose price is
opposite stability and distinguishes easily, real estate foam is to point land price foam substantially. Real
estate foam is a kind of important manifestation of economic foam. It isn’t equal to “real estate
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overheating”. Real estate overheat, call again “excessive development”, is when a speed of the
requirement increase on the market fails to catch on the added supply increase, it appears that housing
vacancy rate raises, property price and rent descend. Overheat reflects the supply and demand relation
on the market, and foam reflects the relation between market price and net value. If the market price
keeps on soaring and the soar arrives to the maddening situation, but this kind of soar is due to excessive
speculation, then the real estate appears.
From above definition, we can see obviously, the direct and the most important reason that real estate
foam produce is the people’s excessive speculative behavior, which is produced by the expectation the
price changing in the future. If the expectative price can’t produce, the speculative behavior also can’t
produce. Therefore, while studying real estate price speculation, must clear up the exceptive price is
how to form.
Real estate has the characteristics that build period is long natural life and economic life are long
and land supply is limited. These characteristics come to the decision that the short-term supply in the
real estate market is inelastic. From this we can consider, supply conditional change is impossible the
chiefly determined factor to price expectation formed. Therefore, the expectation of future remand
change will become the chiefly determined factor to price expectation formed. Because real estate
market exists a lot of positive feedback transaction, namely investors carry out transaction according to
the trend of asset price in the past but the net price. Therefore, we could assume that positive feedback
transaction is determined to real estate market demand change in the future. Following we will elaborate
the theory framework formed of real estate traders’ speculative behavior according to above assumption.
Along with improving social prosper extent; society appears a large of speculators who own the
idle capital of large quantity. They pursue the largest profit to capital everywhere. When the exceptive
house price will go up, they buy a certain quantity of house properties by present market price. Then
them are sold out by raised price, sequentially obtain capital gains. This gain is rather considerable, from
20% to 50%, even 100%. This is a kind of enlarge effect, it attracts more idle capitals to buy house
property, not is for living but is for the sake of speculation. When a “house property purchase group”
comes to a city or a region, they promote the house property price of this city or region to soar, forming
real estate price speculation.
This kind of enlarge effect will continue. When the growth rate of real estate price exceeds bank
loan interest rate the investor who has no lots of idle capital will borrow funds to set up building and
buy house property, then selling with the high price. Many investors adopt to activity consistently, will
cause real estate price to rise by a large margin. However, when house price goes up, the investors who
own many houses not always obtain the highest profit. If bank loan interest rate exceeds housing
mortgage loan interest rate, adding to the higher real estate transaction cost, investor will be faced with
the great uncertainty.
Excepting the upscale real estate price to run high that cause invest behavior also lead to real estate
price speculation. In the market traders favor the upscale real estate excessively that will break the
market supply and demand balance, making the real estate price of this grade keep on rising and forming
price foam. However, the target that investor obtain real estate exceptive price change bringing profit
makes this kinds of speculation mechanism and real estate transaction cost to become barrier of
purchasing real estate in advance. The motive that these investors purchase upscale real estate do not use
for themselves but use to speculate completely.
Although investor has many chances to obtain variety of profits, from the view of real estate
exceptive price forming, we could consider two factors mainly: suppose capital profits exception is zero,
real estate owner obtains profits from using property The real estate owner’s exceptive price change
leads to increase and decrease of capital profits. We can use the formula as follows to indicate price
composing.
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Pt = Pt m = H t
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(1)
Among them, pt is real estate price; ptm is the real estate price when the capital profits is zero; Ht is that
obtain the present value of exceptive capital profits when regard real estate as a kind of assets. The
present value of exceptive capital profits can be indicated:
H t = H t*+1 / (1 + it )
(2)
Among them, H*t+1 is the next exceptive capital profits; i is t period interest rate.
Above equations (1) and (2) shows that price of real estate is composed by two parts: real estate use
value and the real estate present value after each lagging period profits. Ahead period interest rate is
usually used to compute the present value the next period capital profits.
According to positive feed back mechanism, real estate capital profits are related to next profits. Namely,
it’s influenced by ahead period price growth rate. This kind of feedback mechanism can use the formula
to indicate as follows:
H t*+1 = f ( gt −1 )
(3)
Above formula shows that H*t+1 is determined by the growth rate of past price gt-1 .gt-1 can be use the
formula to indicate as follows:
gt −1 = ( Pt −1 − Pt −2 ) Pt −2
(4)
P is real estate price.
In Equation (1), ptm is regarded as real estate price when capital profits are zero, representing the
obtained profits that real estate user from using property. It may be considered to be relative to revenue y
and short-term interest rate. Revenue and interest rate are the negatively correlated. Investors; Revenue
rising will increase real estate and other goods’ consumption. But interest rate will increase mortgage
age loan expends, decreasing governable revenue. Therefore, ptm can be indicated;
Pt m = f ( yit ) i*
(5)
i* is long-term interest rate.
Bring equation (3), (5) into equation (1), can get the formula as follows:
Pt = f1 ( yit ) i* + f 2 ( gt −1 ) (1 + it )
(6)
In the above real estate speculation price model, generally assume 2p/2y>0, 2p/2i<0, 2p/2g>0.
Through above theory analyzing, we understand the reason that real estate price speculation is
formed clearly. These relevant variables are real estate price governable revenue lean interest rate, the
net growth rate of past real estate price namely speculation degree. These variables establish the theory
foundation for further founding real estate speculation degree checked model.
Then we study the real estate speculation degree checked model. Founding real estate speculation
degree checked model divides into two steps to proceed primarily.
First, establish approximate linear equation according to equation (6). Carry out return analysis to
the linear equation, computing each parameter value, Secondly, computing speculation degree according
to the parameter values.
Firstly, establish calculation economic model, computing parameter values. According to equation (6)
establish approximate linear equation as follows:
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、
Pt = a0 + a1 yt + a2it + a3[(gt −1 ) /(1+ it )] + ut
(7)
P is real estate price; Y is resident’s governable revenue j i is loan interest rate; g(t-1)/(1+it) is the net growth
rate of past real estate price; u is random error.
Then compute speculation degree according to
the parameter values. Gt*1 is the growth rate of
estate price, investors except that the growth rate of future real estate price is gnt+1, also to be
indicated:
all
real
past
gtn+1 = kgt −1
(8)
Make a derivation in the two sides of equation (8), getting the formula about gnt+1 and gt-1 as follows:
∂gtn+1 / ∂gt −1 = 0
(9)
Because real estate price is concerned to interest rate closely, and is a kind of reverse relation Therefore,
we get the formula as follows:
∂Pt / ∂it = ∂Pt / gtn+1 = −(∂Pt / ∂gt −1 ) / k
(10)
Compute i and g derivatives to equation (7), getting the equations as follows:
∂Pt / ∂it = a2 − a3 gt −1 /(1 + it )2
(11)
∂Pt / ∂g t −1 = a3 /(1 + it )
(12)
And
bring equation (11), (12) into equation (10),getting the equation as follows:
k = [a3 /(1 + it )] /[(a2 − a3 gt −1 ) /(1 + it )2 ]
(13)
In above equation, I value and g value is usually very small, so above equation can be indicated:
k = a3 / a2
(14)
Therefore, k can be indicated real estate industry speculation degree, namely the influence extent
of real estate past price to future price. If k is too high, show that it exists large speculative behavior in
real estate foam exists is great; on the contrary, the possibility is small.
We make use of above method to study the speculation for Beijing Shanghai Tianjin Shenyang
according to the dates from 1994 to 2004. The speculation degree of Shenyang real estate industry is
minimum, for 0.072; Shanghai’s is 0.2, only next to Beijing. Beijing is 0.211 Tianjin’s is 0.12. Because
length of writing is limited, the computing process is simplified. Although the real estate speculation
degrees for these several big cities are not high, we find the dates of 2002 to 2004 go up fiercely in the
process of date analysis. It explains that economic powerful increase makes the speculative behavior of
real estate industry play much strong. Although it does not develop to real estate foam, there is at a
distance from 0.4 that is warning line. The trend is worrying. The government should be on the alert,
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enhance management to bank real estate foam and its threaten to Chinese economy.
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Conclusion
Research shows that, China do not yet form real estate foam. But the speculation heat fast
enhances after 2002, it shows real estate economy is very hot.
The direct and the most important reason that real estate foam produce is the people’s excessive
speculative behavior, which is produced by the expectation the price changing in the future. If the
expectative price can’t produce, the speculative behavior also can’t produce. The expectation of future
remand change will become the chiefly determined factor to price expectation formed. Therefore,
speculation price is formed by anticipating a rising real estate require price real estate net price
governable revenue loan interest rate and the net growth rate of real estate prices in the past namely
result which speculation degrees. Speculation degree could measure the intension for speculative
behavior and the close extent for real estate foam. Government decides whether to adopt to steps or not
according to the speculation degree sizes, and restrains or precautions real estate foam to occur.
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