Abstract
Housing prices in China have been rising rapidly in recent years, which is a cause for concern for China’s housing market. Does bank credit influence housing prices? If so, how? Will the housing prices affect the bank credit system if the market collapses? We aim to study the dynamic relationship between housing prices and bank credit in China from the second quarter of 2005 to the fourth quarter of 2017 by using a time-varying parameter vector autoregression (VAR) model with stochastic volatility. Furthermore, we study the relationships between housing prices and housing loans on the demand side and real estate development loans on the supply side, separately. Finally, we obtain several findings. First, the relationship between housing prices and bank credit shows significant time-varying features; second, the mutual effects of housing prices and bank credit vary between the demand side and supply side; third, influences of housing prices on all kinds of bank credit are stronger than influences in the opposite direction.
Highlights
The importance of the link between the housing market and macroeconomic activity in China has been proven with plenty of evidence in the literature (e.g., Hong 2014; Cai and Wang 2018)
This paper estimated the TVP-vector autoregression (VAR) model using a simulation by drawing M = 20,000 samples with the Markov Chain Monte Carlo (MCMC) algorithm and discarding the initial 2000 samples in the burn-in period
The Impulse Response Function is considered a useful tool to show the dynamic movements simulated by running the VAR model
Summary
The importance of the link between the housing market and macroeconomic activity in China has been proven with plenty of evidence in the literature (e.g., Hong 2014; Cai and Wang 2018). The real estate market has made a significant contribution to the Chinese macroeconomy. The real estate industry contributions to GDP and the tertiary industry have been maintained at over 5% and 12%, respectively. One drastic decline was observed in 2008 due to the global financial crisis. That crisis was directly caused by the decline of the US GDP in the third quarter of 2008, which did not revive until the first quarter of 2010. It was triggered by a sharp decline in housing prices after the collapse of the property bubble, leading to mortgage delinquencies, foreclosures, and the devaluation of housing-related securities
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