Gary Painter, Xi Yang, Ninghua Zhong

Journal of Financial and Quantitative Analysis, forthcoming

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This paper examines to what extent household consumption responds to changes in housing wealth using household-level panel data in China. The analysis shows that housing wealth has a positive impact on household consumption. These results not only help us understand the economic consequences of housing market development in China, but also carry more general implications for other countries.

About the author

Gary Painter, Sol Price Center for Social Innovation, University of Southern California

Xi Yang, Department of Economics, University of North Texas

Ninghua Zhong, School of Economics and Management, Tongji University

Keywords

housing wealth, household consumption, precautionary saving, China

Brief introduction

For many households around the world, housing wealth is the most important component of a household’s portfolio and has been linked in many studies to household consumption. Most studies have documented a positive marginal propensity to consume out of housing wealth, though its size remains uncertain. Understanding how housing wealth affects household consumption remains an important area of research, because the size of the estimate will determine the extent by which housing market shocks translate into the real economy and how policies should respond to these shocks. A key advantage in studying the Chinese housing market is the absence of the collateral channel, as households are prohibited from withdrawing housing equity.

We are using a large household-level panel dataset called the Urban Household Survey (UHS), which simultaneously tracks housing wealth and detailed consumption of more than 19,000 urban households in China. These household-level data make it possible to assess the importance of the precautionary saving channel by exploring different sub-samples in a way that is not possible using many aggregate-level datasets. To do so, we have designed three tests to explore the precautionary saving channel. The first test compares consumption responses of public- and private-sector employees. The second test compares the consumption responses among college-educated and non-college-educated workers. The final test takes advantage of the UHS data, which include a broad set of consumption categories, enabling us to test the precautionary saving channel with better-defined discretionary and nondiscretionary consumption.

The results suggest that housing wealth has a strong impact on consumption among Chinese households. With the household fixed-effects model, we find that for every 1 percent increase in housing wealth, household consumption increases by 0.14 percent, implying a marginal propensity to consume (MPC) out of housing wealth of 0.023. Further, we find that this marginal propensity to consume is the largest among employees who face greater income uncertainty, suggesting that precautionary saving motives are driving the results.