An Empirical Study of Buying a House or Renting

An Empirical Study of Buying a House or Renting
ZHANG Gaohua, XU Dengyao
West Normal University, Institute of Regional Economy, China, 637002
[email protected]
Abstract: As the housing problem is related to people's livelihood and social stability and an important
issue, which have been caused grass-roots people and the Party Central Committee's great concern, and
the leader has been work hard to resolve this event. However, soaring house prices continues, and far
than the growth rate of the income of urban residents. Because of in small cost to get the maximum
benefit, the war between to buy a house and rent is intensified. In this paper, we are in search of the
relevant date from 1990 to 2009, and then we conduct quantitative analysis of econometric model
simulation to get decisions of urban residents for identifying the determinants of per-capita housing. As
well as buyers and tenants to compare the economic return on investment and finally draw some
conclusions and constructive proposals in current economic situation. At last, we hope the paper is a
guide for the buyer or the renter in the present economic climate.
Keywords: Price-earnings Ratio, Buy a House and Rent, Empirical Analysis, Relevance
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1.
Introduction
Because of China's specific national conditions and the formation of prices with Chinese characteristics,
the price soaring in the real estate industry till is a major issue in people's livelihood. Minister of
Housing and Urban-Rural Construction Weixin-Jiang, March 8, said: "In the future 20 years, the housing
price pressures remain strong in China." due to the next 20 years which are still China's urbanization,
industrialization, and high-speed development period, and greater demand for houses, while land supply
is limited. So the upward pressure on house prices are still not be underestimated. Because of house
prices rising, house prices to income ratio is far beyond its reasonable limits, while rental- housing also
deviate from international standards than the interval. Price-- income ratio refers to the ratio between
regional housing prices and household income, and international practice that the price-income in 3 - 6
times is reasonable interval, if the factors of housing loans to be considered, the proportion of housing
consumption total income should be lower than 30%.In our country, Prices in each city income-ratio is
unbalanced, mostly medium and small cities housing prices six times higher than income ,belonging to
high price range, Survey shows that house prices in most cities 6 times more than revenue, including
Beijing, Guangzhou, Dalian, Shenyang, Nanjing and Xi'an where price-income ratio is in excess of 20
or higher. Rental-housing is the ratio of between mean monthly per square meter of usable area rents and
house prices per square meter of floor area, is an international accepted standard and be used to measure
the existence of the real estate market bubble. Passage of a reasonable rental -housing in the world is in
the 1/200---1/300 interval If the rental ratio is below 1 / 300, indicating a relatively smaller investment
value of real estate, there have been real estate bubble; if more than 1 / 200, indicating that this region is
relatively large real estate investment potential However, both rental ratios is higher than the 1 / 200, or
less than 1 / 300, all showed that house prices deviate from the rational and the real value of the property.
Thus, the issue is to rent or buy a house for the majority of the residents in the end and what could have
been more satisfied with the proceeds .This paper, we are made use of a large number of urban residents
and in an empirical analysis of the data to identify the determinants of the problem in order to solve the
problem.
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2.
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Buying a House or Renting Empirical Analysis
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2.1 The scope and groups of issues to buy a house and rent
Cities and towns are China's major commercial housing development and sales base and the land of
them is the basis resource of the real estate industry booming ;then the scarcity of the urban land and
growing speculative investment in real estate making the profits are soaring; Business profit
maximization and the Government's right to rent-seeking frequently what get the government and
enterprises to do the "black-box operation" ,and the union further promote the price of irrationality; Also
to use houses that have been completed and the people's welfare reducing the efficiency of the reduction,
real estate developers continue to grab the remaining value of housing in the near-zero-sum game
competition, allowing consumers to continue to reduce the surplus, while the producer surplus increase .
Therefore, the urban population in general is the greatest victim under those interest groups, and those
who are masters of the wealth are squeezing a little bit of the suffering of those who are already
breathless. More prominent are those young people who have just taken the ivory tower and have
neither experience nor accumulation of wealth, it would have a pure and indomitable face, but also
forced marriages and livelihoods under the pressure of becoming cynical, loss flawless.
Of course, in the eastern region, with the new rural reconstruction, the old houses in the rural will cease
to exist within a decade, then the new residential areas and the villas will become a new scenic line, and
low-cost rental houses in rural areas are also seasonal birth. It is worth noting that the moment to buy a
house or rent in rural areas, although the question is " Little lotus was exposed sharp corner", in ten
years time or even less than a decade will be the major issues in people's livelihood.
2.2 2009 National circumstances and the actual sales of commercial tenants of the "negative Weng
life"
2.2.1 Macro data analysis
The data from Table 1 can be seen across the country, not only the eastern part of the economy is
relatively mature, and as the central link regions and countries strongly support the western region, as
well as an area of commercial housing sales have increased year by year, but a huge increase. On the
one hand, this is only due to rise in domestic prices, but also on the basis of inflation, buy a house not
only meet the traditional sense of security and privacy, psychological needs, but also can serve as a
currency hedge against inflation and reasonable investment, risk diversification an effective way. On the
other hand, children who were born in eighties of the last century baby boom have already grown up,
faced with pressure to get married buy a house, but their weak economic base, commercial housing just
to meet the needs of the average consumer buy a house, and the pursuit of wealth, luxury goods owner's
motives were different significantly.
Area
Table 1 Area and sales of commercial housing sales growth (2009 January-December)
Sales of commercial housing area Sales area growth rate (%)
(square meters)
National Total
93713.04
42.1
The eastern region
48248.21
47.6
The central region
21758.58
32.9
The western region
23706.24
40.2
Source: Data from China Statistical Yearbook 2009.
2.2.2. Micro-Determinants Discussion
405
Figure 1 Determinants of urban per capita living space scatter plot
Cities and towns as the main settlements houses sales, to buy a house and rent more intense ideological
struggle, and "buy a house faction" and "dynamic game rental faction is in full swing. Today, however,
living space for urban residents as the most important indicator, that is not only to describe the living
conditions of urban residents, but also is a barometer in the results of the PK between the buyer and the
renter. Here we have to analyze the urban per capita living space of the decision factors, which, is better
to improve people's living conditions and improve people's living level of benefits and effectiveness. We
use s to represent the urban per capita living space; ss is used to indicate the completion of urban
housing area, and is used to approximate the stock of urban housing; we use y to represent a first-order
per capita disposable income that is Y (-1), this indicator is used to approximate description per capita
living space depends not only on current disposable income, but also depend on their past cash flow
expectations for the future, as well as permanent income and so on; pl is to represent the urban
population. we are the use of the data in 1990-2009 of Statistical Yearbook , making scatter as shown in
Figure 1, observation can be seen, s and y, ss, pl linear relationship exists among the three. Then we are
use of econometric software Eviews to do multiple regressions, and the results are shown in Table 2.
Table 2 Eviews output
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
5.406900
1.122305
4.817673
0.0003
SS
2.33E-05
1.03E-05
2.255244
0.0420
Y
0.000242
0.000128
1.893469
0.0808
PL
-0.000248
3.94E-05
6.288100
0.0000
R-squared
0.997045
Mean dependent var
19.32941
Adjusted R-squared
0.996363
S.D. dependent var
4.320846
S.E. of regression
0.260568
Akaike info criterion
0.350417
406
Sum squared resid
0.882642
Schwarz criterion
0.546467
Log likelihood
1.021458
F-statistic
1462.210
Durbin-Watson stat
2.169937
Prob(F-statistic)
0.000000
Thus, from Table 2 we can conclude that, in the 0.1 significance level, and can be drawn:
ŝ = 5 . 406900
+ 2 . 33 s sˆ + 0 . 000204
p lˆ
yˆ − 0 . 000248
（4.82） （4.26）
（1.89）
（6.29）
R =0.997, DW=2.17, F=1462.21
That is to say：S what is per-capita housing area of urban housing and urban completed area of ss and the
first disposable income y are related，but s to the total population in cities and towns is negative
2
correlation. In other words, urban per capita living space of urban housing increases with the completion
of the area or the in per capita disposable income rising, but increase with the total population declining.
Specifically described as follows: In the other conditions remain unchanged, the urban area of housing
completed increased by 1 million square meters of urban per capita housing area increase sby 2.3.3
square meters; in other cases the same conditions, the first-order lag of disposable income for each
additional 1 yuan, and urban per capita housing area increases 0.000204 square meters; When other
conditions remain stable, the urban population increased by 1 million people, then the urban per capita
living space decreases 0.000248 square meters.
For renters, they do not have to buy a house as frugally, tight their belts in the cities who were lived in
slave-like room hard life And every month a large number of liquidity areat their disposal, their pursuit
to the beauty of the process of and freedom, as well as they also enjoy the suffering and enjoy active in
the passive. After the chic, the emptiness and loss are coming and the hit is life's transparency and
privacy exposure together with the lack of autonomy arrangements and lack of freedom of life. When
inflation shocks and house price is continue to become increasingly expensive the currency and
wealth preservation and appreciation, The happiness index of family life has to be taken into account.
To rent will be the best choice no longer, and it is only jumping rice from the ordinary into the
remarkable life, or from the freedom to responsibility, but have a set of their own homes will be the last
way to an end. This is the tenant of the "negative Weng life", but this is alleviated that the "moth flying
into the fire"-like to have a "home" impulses and expectations in a short time after all.
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2.3. Economic benefit analysis
Nanchong City, Sichuan Province is an example: the situation is that ordinary commercial house-price is
higher than 3,000 yuan / square meters, then we assume that a family have three persons, and house
prices are 3,500 yuan / square meter, and one-time payment is paying back the 350,000; Second
situation, the family rent an 100 square meters of fine rooms, and monthly rent of 1,500 yuan,.
Compared the two situations, the list is as follows:
Table 3 1Comparison of two types of investment methods
Payment Forms
A one-time purchase of
Annual Rental
Total Investment (million)
35
35
Annual rate of return (about 50 years) 6%
3.6%Assuming the rent, interest
rates are lowered) 5-year time
deposit rates
Annual income (million)
2.1
1.26
yearly depreciation 2%
Deduction items (million)
Annual rent 0.15*12=1.8
，
1
Excluding the source of funds to buy a house and salary income, we only look the behavior to buy a house as an
investment.
407
Annual net income (million)
50 Total investment income (million)
50 years later, the remaining assets
(million)
Other additional costs (million)
Net income from investments
35*2%=0.7
1.4
1.4*50=70
70(Real estate has reached the
end of life)
About 25 (based on market prices
for 50 years, raising room fees)
35
-0.54
-0.54*50=-27
-27+35=8
About 0
8
As can be seen from Table 3, the long term interest rates are relatively lower in the case, to buy a house
as a long-term investment, and the final gains more than the way that to save money in the bank. In
addition, from the view of traditional values is also true that to own a set of house will be a symbol of
identity and status of the upgrade, but also to meet the people to retain the right to privacy, and access to
a great sense of security. That is without taking into account other types of investment under the premise,
and inventors who buy the house will get greater benefits and effectiveness than the renters.
3.
Conclusion and Policy Recommendations
3.1. From the above analysis we can see that there are advantages and disadvantages for people to buy a
house or rent. In the short term, for young people who are lack of liquidity ,to rent is a good choice,
because they are just enter the community, and young people are unwilling to come up with nearly
two-thirds earnings per month to pay the monthly mortgage, let alone who also have the heart to take
the parents of this pension which is not sufficient to cover the down payment in exchange for personal
comfort of the living conditions ; In addition to the larger groups whose job is mobility and income is
instability , but also it is premature for the purchase of house, and too many uncertain factors interfere
with their choices, so renting can have a better career development and lay the foundation for a superior
living and the environment in the future. Consideration from a long-term, buying a house will be to
enhance its effectiveness. Today inflation is occurred often and globalization is becoming wider.
Currency uncertainty the investment risk aversion, as well as one which will affect the economic
situation of moving the body, making having a home can not only enjoy the pleasure of spending ahead
of schedule, but also to achieve a better preservation of wealth and value-added, and it is a kind of
investment that the rich men like best. So, wavering and confusion between the two different groups is
inevitable, but through the analysis of this article, I believe in the different groups can also have their
own choice.
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3.2.In terms of economics we can understand that there exists the two-way causal relationship between
psychological expectations and actual price, the growth of prices depends not only on the above reasons,
but also on the expectations of people for the price rise Psychological expectations of rising prices
contributed to the actual rise in house prices that are the psychological self-fulfilling expectations. Thus,
according to the view of school of rational expectations, we can use current and past information and
data to analysis and forecasts dynamically to make a reasonable rational analysis in the future. This need
cultivate awareness of economics for the residents and learn to use rational thinking to analysis of the
practical problems of life.
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3.3.Through the second part of the empirical analysis, we can draw some simple policy
recommendations: First of all, since the price income ratio in China's departure from a reasonable range,
and urban per capita living area is positively correlated and with first-order delay per capita disposable
income and urban housing area that have been completed, so the government's macro-control will play a
critical role ,and it is to control the price at a reasonable range, or an appropriate adjustment of wage
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income, making the income ratio at a reasonable price inter-regional. Second, controlling excessive
population growth, housing demand dispersion, and making supply-demand balance, there are no
demand-led price growth. Finally, the government should channel investment to cool down real estate
speculators and to improve the effective utilization of real estate.
Author in brief:
Zhang Gaohua (1988 -), female, place of origin ( Tai'an City, Shandong Province), China West Normal
University, the Regional Postgraduate Institute of Economic Research 2009. Work Unit: Nanchong City,
Sichuan Province, China West Normal University, Institute of Regional Economy. Zip Code: 637002
Xu DengYao (1956 -), male, deputy director of Sichuan Provincial Geographical Society, the West
China Normal University, Director of Research, enjoy the state's special allowance, the Regional
Economic Research Institute, Master's tutor.
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