Housing, consumption and monetary policy: how different are the first-, second- and third-tier cities in China?

ABSTRACT

This article presents an empirical analysis of the relationship between house prices and the real economy in China’s first-, second- and third-tier cities. A Structural Vector Autoregression model is applied to study the impacts of monetary policy shocks and housing demand shocks on various housing markets across China. We also investigate the role of house prices in the transmission mechanism of monetary policy. The results reveal that in first-tier cities, raising interest rates has a stronger negative effect on house prices. Also, as house prices decrease in first-tier cities, private consumption declines sharply. There is a stronger role of housing markets in the transmission of monetary policy shocks in these cities. Our findings indicate that interest rate adjustment could effectively curb spikes in housing prices in the first-tier cities, but the impact of such adjustments on household consumption must also be considered.

KEYWORDS:

• House prices
• housing market
• consumption
• monetary policy
• SVAR

JEL CLASSIFICATION:

• E44
• E52
• R31

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ http://www.ce.cn/xwzx/gnsz/gdxw/201705/24/t20170524_23147241.shtml.

² There are 4 first-tier cities, 15 new first-tier cities, 30 second-tier cities and 21 third-tier cities in our analysis. First-tier cities are Beijing, Shanghai, Guangzhou and Shenzhen; new first-tier cities are rapidly developing economic centres; second-tier cities are the capitals of some provinces as well as cities that show increasing economic development. The rest are third-tier cities.

³ 0.84% × (0.54%/0.65%).

Additional information

Funding

This work was supported by the Natural Science Foundation of China (NSFC) under grant numbers [71603051 and 71603276].