Housing price fluctuations and financial risk transmission: a spatial economic model

ABSTRACT

Financial risk derived from housing price fluctuations in China garnered much public concern recently. Based on the theoretical analyses of the transmission of financial risk from housing price fluctuations, this paper establishes panel spatial Durbin models to empirically analyse housing price fluctuations and financial risks transmission from a spatial economic perspective. Employing the panel provincial data from 1999–2015, we conduct an analysis on the 30 provinces in China as well as a comparison among the Eastern, Middle and Western regions of China. The results indicate that: (1) The soaring housing prices driven by bank credit, real estate developers’ heavy investment, local governments’ land revenue and individuals and households demands leads to financial risk in various sectors; (2) due to the ‘substitution effect’, the capital agglomeration in metropolis from bank credits, real estate developers, and individuals and households furthers the amassment of financial risks; (3) housing prices have a significant spatial contagion effect throughout the country, and financial risk could directly transmit across provinces through housing price fluctuations; (4) financial risks could indirectly transmit across provinces via the ‘imitative behaviour’ or ‘driving effect’ of different sectors for different regions of China.

KEYWORDS:

• Housing price
• financial risk
• spatial diffusion
• investment

JEL CLASSIFICATION:

• R31
• P34

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Tibet is not considered in the empirical analysis as data for Tibet is unavailable.

Additional information

Funding

This research was supported by the [Humanities and Social Science Foundation of the Ministry of Education] under Grant [number 19YJCZH102; [Natural Science Foundation of Jiangsu Province] under Grant [number BK20170275]; [Philosophy and Social Science Foundation of Jiangsu Province] under Grant [grant number 15EYD004]; and [China Postdoctoral Science Foundation] under Grant [grant number 2016M591948].