Real estate and Inflation in China

Name: Bosong Wang

Student Number: 40303198

The main purpose of this article is to analyze the relationship between real estate and inflation in China.

Inflation means that money is worthless. In other words, you have to spend more money to buy the same goods (Ralph, 2017). This can be called devaluation, and also this can be called inflation.

Real estate is a commodity, and also it has two attributes: one is the attribute of consumer goods as a consumption function, the other is the financial nature of assets. When it is a consumer good, it can reflect the impact of inflation on housing prices, the phenomenon of assets and inflation rising simultaneously. On the one hand, housing prices reflect inflation; on the other hand, housing prices beat inflation.        

In 1998, the Chinese government made a major adjustment to its housing policy. This important move turned real estate assets into tradable commodities. Over the next 15 years, property prices soared, which led to higher inflation. Zhang (2012) believes that housing is an important factor to bring family happiness. In China, people do not like to rent a house to live in. Most people want to own their own their own house, but they do not have enough assets to buy a house, because of inflation. National Bureau of Statistical of China (2015) shows that real estate market of China experienced rapid growth in both housing price and investment from 1999 to 2013. Housing prices rose by more than 10% and investment grew by more than 20%. Hui (2012) pointed out that the development of the real estate market has also made a great contribution to China's economic development. Ten years age, houses were not expensive. Most people could buy two or three houses of their own. Now people have money, but the house price has become higher, most people cannot afford even one house. That is the economic impact of inflation.

There are three factors driving property prices. The first is the cost of construction. With the progress of society, land resources have been overexploited, so land has become scarce, leading to price rises. The second is increased demand. As urbanization accelerates, lives and assets of people are getting better and better. Many people want to buy a house of their own, such as couples getting married. The last point is economic growth. People find that the rate of return on money deposited in Banks is lower. According to the Chinese Mainland Real Estate Markets (2016), real estate investment and development are the fastest in tier 1 cities, such as Beijing and Shanghai.

In conclusion, although the rapid progress of Urbanization in China has brought economic development to the society, it has also brought inflation. The Chinese government is trying to fight inflation. Government workers stabilize prices by controlling the money supply. Furthermore, they adjust the structure of the economy, so that the parts of the industry are in proportion to each other. Moreover, they reduced restrictions on production and encouraged companies to adopt new technologies and equipment to expand their supply of goods.


Reference:
O'Neill, R, Ralph, J, & Smith, P., (2017). 'Inflation', History and measurement, pp.21-38
Zhang Y, Hua XP & Zhao L., (2012). 'Exploring determinants of housing prices: A case study of Chinese experience in 1990-2010', Economic Modelling, 29(6), pp. 2349-2361
Hui, ECM, et al., (2012). 'Housing and consumer markets in urban China', Construction Management and Economic, 30(2), pp.117-131
Foo, C., (2019). 'Finance and strategy inside China', The Chinese Management Book-of-Reading Series, pp. 49-65

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