The impact of housing prices on government debt: a new vision based on the intermediary effect of land finance in China

ABSTRACT

This article presents evidence that land finance has a significant intermediary effect on housing price and local government debt in China. It is found that the mediating effect accounted for 88.06% of the total effect. Due to the mismatch between their discretionary fiscal resources and mandatory expenditures, local governments have a strong incentive to borrow with land-related fiscal revenue as the collateral for repayment, making land finance an intermediate mechanism in which the real estate boom eventually leads to the expansion of local government debt. And this conclusion is steady, and intermediary role of land finance is still significant in different areas and different periods. This provides a new perspective on the risks in China’s local government debt and property markets.

KEYWORDS:

• House prices
• local government debt
• intermediary effect
• land finance in China

JEL CLASSIFICATION:

• E62
• E69

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The reason why per capita GDP is not applied here is that it is highly correlated with the housing price of the explanatory variable, which leads to endogeneity problems

² In China, this wage level is usually adjusted by the state in accordance with economic development, financial situation, price changes and other factors, and can be regarded as an exogenous variable

³ The criteria for regional division come from the National Bureau of Statistics

Additional information

Funding

This work was supported by“the Fundamental Research Funds for the Central Universities” in University of International Business and Economics(19YB25)and National Natural Science Foundation of China (71603051).