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Economic growth and housing investment: which takes the lead?

By Zhang Qingyong, Zheng Huanhuan and Nian Meng | 2013-07-25 | Hits:
(Chinese Social Sciences Today)

A construction worker fastening scaffolding skyscrapper

China has seen a steady one-directional causal relationship between economic growth and increase in residential real estate investment; however, no evidence can be found to support the viewpoint that investment in housing has fueled economic growth. Since the middle of the 1990s, China has established housing construction as a new field for growth of the national economy, supported housing and commercial real estate as staple industries, and launched a series of policies to encourage investment in housing. In fact, economic growth has caused housing investment to accelerate, not vice versa.
Theory that “residential investment fuels China’s economic growth” unfounded
Economists and policymakers’ understanding of the relation between residential real estate investment and economic growth has changed during the past few decades. through different periods in China. During the years for which China had a planned economy, a very small proportion of the total budget was allocated to housing, and it was always among the first areas to receive cuts whenever there was a decrease in investment; as a result, living area per capita was miniscule and there was a serious housing shortage.
In the early years of reform and opening-up, this situation turned around as the share of housing investment as a percentage of GNP (no statistics of GDP were collected then) rose from 1.5% before reform and opening up to over 7% afterwards. The government evaluated the status and contribution of the residential and commercial positively and promoted the idea that housing investments could stimulate economic growth. At the same time, some scholars observed that large-scale investment in housing construction and maintenance could draw capital away from heavy industry, agriculture and infrastructure, stunting the growth of all three.
In reaction to the economic slump around 1997, investment in the housing construction was given prominence as a new focal point for national economic development; this emphasis was reflected in a series of residential building policies. For instance, the following year, one of the guidelines for “housing system reform” was “to accelerate residential construction and promote the housing industry as a new field of economic growth,” and in the same year, The People’s Bank of China issued a notice requiring that all commercial banks should support housing construction and consumption. From then on, policies encouraging housing construction have been widely promoted, as its perceived significance in spurring economic growth is taken as an unquestionable presupposition or plain common sense.
In order to show the relation between housing investments and economic growth, we collected and analyzed statistics from provinces, cities and regions in China between 1985 and 2009. From our empirical research, we have drawn the conclusion that economic growth has stimulated housing investments; however, no evidence could be found to demonstrate that investment in housing has propelled economic growth. To confirm this conclusion, we further examined its validity in different time periods and regions. As had been shown from analysis of our initial data sets for 1985 to 2009, evidence from before these dates and additional evidence from after the housing system reform in 1998 verified a consistent one-directional causal relationship between economic growth and increase in residential investment, both on the national level or the regional level, while no evidence supported the conclusion that housing investments could spur economic development. Therefore, we need to reconsider the emphasis policy has placed on increasing housing investment to bolster economic development, as well as the conception that residential construction is fertile area of economic growth and staple industry. 
No strong correlation between real estate industry and other sectors
One conception of the real estate industry is that it encompasses or is closely connected with vertical industries, and it should be or already is a staple industry. In Shanghai, real estate was included in the 10th Five-Year Plan as one of the six “pillar industries”. Among the sixteen cities in the Yangtze River Delta Economic Zone, ten have designated it as a pillar industry and the remaining six have emphasized the importance of and adopted favorable policies toward real estate despite having not explicitly designated it a pillar industry.
Some, however, have questioned and opposed to this idea. Real estate is not an umbrella term for all the related vertical industries including production, circulation, consumption, management and service; rather, it is merely a small portion of these. As has been stated by National Bureau of Statistics of China many times, operations in the real estate sector do not include land consolidation, land improvement or reclamation, and housing construction. According to the statistics of 19 sectors during the first and second National Economic Census, real estate companies only comprised a 2.2% of the economy in 2004 and a 2.4% share in 2008, while employers in the real estate sector only accounted for 2.2% and 2.4% in those respective years. The real estate sector is actually only a small sector in national economy.
Applying sensitivity analysis techniques to information from the Input-output Tables of China from 1997, 2002, and 2007, and the extended tables from 2000 and 2005, we have analyzed the real estate industry’s impact on the national economy both through influence coefficients, which indicate backward linkages between a sector’s performance and that of other sectors, and sensitivity coefficients, which indicate forward linkages. Our results show that from 1997 to 2007, the influence coefficients of real estate are far below the national average level and are actually among the lowest coefficients for any sector; in addition, its influence coefficients got gradually lower after 2000, which means the weak capability of the real estate sector to drive other industries, and this capability is in fact getting increasingly weaker. Besides, its sensitivity coefficients are also below the average, which is indicative of its modest effect in pushing national economy forward.
The real estate sector therefore is far below the average whether it comes to pulling or pushing the national economy forward. There is no evidence to support that the real estate sector is closely related to other industries and could greatly drive economic development; moreover, its effect has been actually getting weaker.
Zhang Qingyong and Nian Meng are from Renmin University of China and Zheng Huanhuan is from The Chinese University of Hong Kong.
The Chinese version appeared in Chinese Social Sciences Today, No. 388. Dec 5, 2012.
Translated by Jiang Hong
Revised by Charles Horne