Housing prices and household savings: evidence from urban China

Abstract

Based on precautionary saving motives, this research develops a three-period life-cycle model to manifest the impact of housing prices on household savings in urban China. The theoretical model illustrates that the expected appreciation of housing prices at a household’s middle age leads to the increase in household savings at a household’s young age. Second, household savings at a household’s young age are positively associated with both expected educational and medical expenditures in a household’s middle age and pension expenditures at a household’s old age. Third, the expected housing prices crowd out educational and medical expenditures at a household’s middle age. With the panel data sets of China’s 31 provinces during 1996–2016, results suggest that the expected housing prices significantly interact with the current household savings. However, the influence of the expected housing prices on the current household savings is greater than that of the current household savings on the expected housing prices. Third, the expected expenditures of education, medical care and pension fuel up the current household savings. Meanwhile, the housing prices crowd out the expenditures of education, medical care and pension. Finally, data of the Urban Household Survey (UHS) over the period 2002–2007 show that the household head age has an effect of reverse U-shape on household savings. Accordingly, to prevent a housing bubble and promote household consumption, policy makers should curb housing price inflation by enacting appropriate countercyclical housing policies.

Keywords:

• Housing prices
• household savings
• endogeneity

Notes

Acknowledgments

The authors are grateful for the discussions at the 2013 International Conference of the Asian Real Estate Society in Japan.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 http://data.worldbank.org.cn/indicator?display=default

2 In this study, household saving propensity is referred to as the ratio of current household saving to current household disposable income.

3 http://www.pbc.gov.cn/publish/diaochatongjisi/126/index.html

4 http://www.pbc.gov.cn/publish/diaochatongjisi/126/index.html

5 Indeed, the dwelling size might be different across household ages. As the purpose of this research is to investigate the relationship between household saving and home purchase, it is easier to handle the theoretical model if the dwelling size is the same throughout the consumer’s lifetime.

6 $UC$ is normally composed of interest rate $i,$ property tax rate $\tau ,$ maintenance rate $m,$ housing capital discount rate $d$ and expected housing price growth rate $g^e$ (Hendershott and Slemrod 1982; Himmelberg, Mayer, and Sinai 2005).

7 For simplicity, we depress subscript $j.$

8 Although we can apply simultaneous equations to resolve endogeneity problems, it is hard to handle simultaneous equations for more than three endogenous variables.

9 Age effects in household lifetime are investigated in the section ‘Robustness test’.

10 On the other hand, household disposable income is not the key variable to be detected, we drop it from both the saving model and the housing price model.

Additional information

Funding

The authors thank the financial support by Programmes for the National Natural Science Foundation of China [Grant No.: 71373276], the New Century Excellent Talents in University, the Fundamental Research Funds for the Central Universities of the Central South University, and the Research Funds of Renmin University of China [Grant No.: 17XNL007].