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The Relationship Between China’s Real Estate Market and Industrial Metals Futures Market: Evidence from Non-price Measures of the Real Estate Market

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Abstract

By using non-price indicators of the real estate market, this paper examines the relationship between the real estate market and the industrial metals futures market in China during the 2004–2019 period. Empirical findings from a vector autoregression model (VAR), a causality study, and cointegration analysis suggest that, in the context of China, industrial metals futures have both short-run and long-run associations with the real estate market. The effectiveness of the mechanisms through which the real estate market affects the industrial metals futures market, however, varies across underlying assets and pre-specified indicators. More specifically, the shock of the size of newly started constructions has the greatest accumulated impacts on the copper futures market, increasing the price of copper futures by 2.46% after two years. Additionally, 11.31% of the changes in the price of copper futures can be attributed to fluctuations in the size of newly started constructions, in which the explanatory power has increased horizontally. The results of impulse response functions (IRFs) show that the price of rebar futures is the most sensitive to volatility in sales size in the real estate market, in which the rebar futures price can be expected to increase by 1.65% after two years. The results of the forecast error variance decomposition (FEVD) method suggest that fixed asset investment in the real estate market makes the largest contribution (about 6.28%) to corresponding movements in the rebar futures price.

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Notes

  1. As reported by the International Copper Study Group (ICSG), around one-half of the refined copper produced in the world is consumed in China. It is estimated that in 2018, more than 30% of the copper consumed in China was ultimately used as raw material in housing construction (Huang et al., 2018). This trend also applies to the use of other base metals (e.g., zinc and aluminum) and to ferrous metals, like rebar (Zhuo, 2018).

  2. The real estate market in China, as the dominant focus of domestic investment, is viewed as an important engine of economic growth. Regulations have been imposed on China’s real estate market to ensure housing price stability and mortgage affordability (Glaeser et al., 2017). To curb speculation on residential properties, Chinese authorities have imposed an idle land tax, a land appreciation tax, and a business tax on properties held for less than five years, alongside other regulations on housing supply. In such circumstances, housing prices are likely to lose the explanatory power needed to reflect market expectations based on the supply–demand relation in the real estate market. In addition, with the rigidity of housing prices, it is improbable to relate volatility in the real estate market, which is generated by shocks in the real economy, to changes in other financial variables.

  3. Land is an important input in real estate development, and the price of land, especially commercial land and residential land, in China has increased enormously over the past few decades (see e.g., Glaeser et al., 2017; Liu and Xiong, 2018).

  4. Since the late 2000s, the policy focus in China has shifted to housing market stability (Glaeser et al., 2017). The central and local governments target housing price stability by controlling both the demand and supply activities, for example, restrictions on second and third home purchases and on the resale of homes in less than five years, imposition of real estate taxes that provides an incentive to buy-and-hold, and the government’s direction on banks’ credit to real estate developers.

  5. Industrial metals, except precious metals such as gold, are generally considered to be risky assets (Huang et al., 2018) and are more sensitive to investors’ sentiment and risk preference (Liao et al., 2018). Meanwhile, real estate constitutes an important component of Chinese households’ and firms’ investment portfolios (Glaeser et al., 2017; Liu and Xiong, 2018).

  6. If the futures market is dominant in the price discovery process, then the spot price can be expected to have little explanatory power when the futures price is treated as the dependent variable. Otherwise, spot price, which contains all current market information, can be regarded as a control variable for examining the linkage between changes in the futures price and shocks in the real estate market.

  7. For brevity, we did not report the results of the ADF test. These results can, however, be provided upon request.

  8. Generally, the FEVD can be derived from the IRFs, but the results of the two approaches are not completely consistent as they describe the different properties of the VAR estimates.

  9. The bivariate Granger causality test rejected the null hypothesis for the size of newly started constructions, and thus the size of newly started constructions Granger cause changes to the price of copper futures (χ2 = 2.8691, p < 0.001). The bivariate Granger causality test did not reject the null hypothesis for the other relationships between real estate market indicators and metals futures. For brevity, we did not report the full results; they can, however, be provided upon request.

  10. In this study, we used Johansen’s methods for cointegration testing based on a trace test and a maximum eigenvalue test. Given an eigenvalue, the corresponding hypothesis would be rejected in turns until the underlying test statistic was insignificant. As intercepts could be included either in the cointegrating vectors themselves or as additional terms in a VAR process, as in this study, this would be equivalent to including a pre-deterministic trend parameter in the latter case. Each panel of VARs had at least one cointegrating vector whereby industrial metals futures were treated as a dependent variable and a trend was included that could have affected the number of cointegrating vectors.

  11. For brevity, we did not report the results of the CUSUM tests. These results, however, can be provided upon request.

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  1. Graduate School of Business Administration, Kobe University, 2-1, Rokkodai, Nada, Kobe, 657-8501, Japan

    Xiangyu Chen & Jittima Tongurai

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Chen, X., Tongurai, J. The Relationship Between China’s Real Estate Market and Industrial Metals Futures Market: Evidence from Non-price Measures of the Real Estate Market. Asia-Pac Financ Markets 28, 527–561 (2021). https://doi.org/10.1007/s10690-021-09334-8

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