Is urbanization improving real estate investment? A cross‐regional study of China

Date01 May 2018
DOIhttp://doi.org/10.1111/rode.12373
Published date01 May 2018
REGULAR ARTICLE
Is urbanization improving real estate investment?
A cross-regional study of China
Tie-Ying Liu
1
|
Chi-Wei Su
2
|
Hsu-Ling Chang
3
|
Chien-Chi Chu
4,5
1
School of Economics and Management,
Beijing Jiaotong University, Beijing,
China
2
Department of Finance, Ocean
University of China
3
Department of Accounting and
Information, Ling Tung University
4
Department of Finance, Shantou
University of Business School, Shantou
5
Research Institute for Guangdong-
Taiwan Business Cooperation, Shantou
University, Shantou
Correspondence
Chien-Chi Chu, Department of Finance,
Shantou University of Business School,
No. 243 Da Xue Road, Jin Yuan District,
Shantou City, Guangdong 515063, China.
Email: jqzhu@stu.edu.cn
Funding information
Ministry of Education, Humanities and
Social Sciences Youth Fund, Grant/Award
Number: 16YJC790064
Abstract
This paper applies bootstrap panel Granger causality to
test the relationship between urbanization and real estate
investment from 1990 to 2014 for 29 provinces in China.
We argue that the patterns of interaction between urban-
ization and investment in real estate vary across regions.
The results show that urbanization does Granger-cause
investment in real estate, primarily in the central and
northeastern regions of China, while urbanization does
not Granger-cause investment in real estate in the eastern
and western regions, except for four provinces. Most
regions do not have a Granger-causality relationship from
real estate investment to urbanization; the exceptions are
Henan and Hei Longjiang provinces. Our results only
support one theory on the relationship between urbaniza-
tion and the real estate market for one-third of the pro-
vinces. Thus, urbanization can improve real estate
investment by increasing the demand for housing as a
result of population agglomeration, but urbanization does
not depend on real estate investment in China.
1
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INTRODUCTION
The main purpose of this study is to analyze the causal relationship between urbanization and real
estate investment in China. Most of the existing studies analyze the relationship between urbaniza-
tion and real estate investment from the holistic perspective, and they fail to investigate the causal
effects of the evolution of a nonlinear relationship in the case of structural mutation (Sakay,
Sanoni, & Deng, 2011; Dasgupta, Lall, & Lozano-Gracia, 2014). We apply the bootstrap
DOI: 10.1111/rode.12373
862
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©2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/rode Rev Dev Econ. 2018;22:862878.
Granger-causality test from a nonlinear perspective and argue that the patterns of interaction
between urbanization and investment in real estate vary across regions. Whether the urbanization
of the population magnifies real estate investment and whether increases in real estate investment
affect the urbanization process are important issues for the government in order to assess regional
development plans in China.
Real estate investment provides opportunities for urbanization by providing more houses for
people. Urbanization in most countries also has a positive effect on real estate investment demand,
especially in the United States and Western European countries. China is remarkable in the world
for its scale of urbanization and its continually increasing number of concentrated metropolitan
regions. One of the key factors in a successful urban development strategy is that it should con-
sider each urban regions endogenous attributes. Urbanization is an extremely noteworthy sign of
economic progress in China. In the process of urbanization, the trend of the change in population
exerts a highly relevant influence on the demand for and structure of real estate in urban areas
(Liu, 2004).
Standard urban economic theory suggests that stringent urban land-use regulation leads to
higher real estate investment, which results in both direct impacts on costs and a relevant decrease
in the elasticity of investment supply (Monkkonen, 2013). The urgent priority for public policy is
to strengthen institutions for urban planning and service delivery to ensure that land use integrates
future investments in housing, industry, and infrastructure and that access to basic services is
expanded to maintain urban livability. As for other countries, it is argued that companies have dis-
tinct spatial patterns of capital investment based on the attractiveness of selected metropolitan
areas in Canada and also the urbanization improves the real estate investment in the United States
(Charney, 2001). While, the weakness of the Australasian and Western European regions stem-
ming from urbanization provides investors with few real estate investment opportunities (Liser &
Groh, 2000).
In 1991, the Ministry of Construction stated that China was unable to provide a free apartment
for each eligible urban household (Shaw, 1997). Since 1992, the substantial marketization of land
and housing and the inflow of foreign capital into real estate have begun to reveal qualitative
changes in the urban development scene (Wu, 2001). Driven by the enormous demand, the annual
volume of completed private real estate units has increased from 140 million m
2
in 1998 to over
610 million m
2
in 2010 (Wu, Deng, & Liu, 2014). There is also an urbanization typethat char-
acterizes Chinas real estate market. While a dual economic structure characterizes the economy,
disparities in economic development levels among urban and rural areas have persisted in China
since 1949. In the process of urbanization, housing investment in the main cities has tended to be
strong. The nature of the dual economic structure demonstrates that the real estate bubble primarily
exists in the main urban areas (Ren, 2005). Feng (2013) argues that urbanization is the main rea-
son for the increase in real estate investment demand, which in turn causes a tightening of the sup-
ply of land and massive rural migration into the cities. This inevitably leads to an increase in the
gap between real estate supply and demand.
The real estate market also has a substantial impact on urbanization. Real estate investment
grew rapidly, from approximately 4 percent of gross domestic product (GDP) in 1997 to 15 per-
cent of GDP in 2014. It has grown at an average annual rate of 20.2 percent since the 1998 hous-
ing reform, which is approximately twice as high as Chinas overall GDP growth (Yu, 2011).
Since the late 1990s, real estate development has characterized urban development across the coun-
try. Cities in China, regardless of whether they are large or small, coastal or inland, are enthusias-
tic about promoting real estate investment. Real estate investment is expected to encourage urban
land development as local governments strive to generate more revenue for their local budgets (Ye
LIU ET AL.
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863

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