Homeownership and financial literacy: evidence from China in the perspective of ‘learning by doing’

Abstract

Financial literacy is becoming an increasingly important policy consideration, yet its determinants are still underexplored. From the theoretical perspective of ‘learning by doing’, the effect of homeownership on financial literacy in urban China is identified by the instrumental variable strategy. First, the borrowing experience to purchase a home can awaken homeowners to develop basic financial knowledge, but the resulting debt burden constrains homeowners from participating in the financial market, crowding out their access to advanced financial skills. Second, the growth in home equity wealth induces homeowners pledge high-value properties as collateral and invest in more homes, in which case the collateralizing experience facilities the advancement of basic finance literacy, while locking the asset portfolio in the housing sector hinders homeowners from learning advanced financial skills. Moreover, the specific kind of financial literacy that homeowners show an advantage in differs depending on their income. These findings cast a new light on understanding the return of housing property to family financial affairs.

Keywords:

• Homeownership
• financial literacy
• financial experience
• learning by doing
• China

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Partial ownership is a special form of homeownership in post-reform China. With the partial property rights, homeowners only have use rights for perpetuity, the right to bequeath, and the right to use the home as collateral for loans but cannot sale the houses until a ban expires, and they need to share the profits from the sale with their work units (Wang, 2012).

2 There are two reasons why both GAHR and PULS are weak instruments. First, due to data limitations, the housing debt variable used in this article assigns a value of zero to both the paid-off mortgage and fully paid homeownership samples, resulting in a weak correlation between housing debt and the subgroup homeownership rates. Second, although the provincial supply of urban land can affect homebuyers’ decisions through the housing prices fluctuations, it is less correlated with the housing debt formed by homeowners prior to governmental land supply.

3 The risky assets are sum of the business assets and the total value of various financial products such as stock, funds, bonds and so on. This variable is in logarithmic form.

Additional information

Funding

This work was financially supported by the National Natural Science Foundation of China (Nos. 71804051, 42171195) and the Planning Fund Office of Philosophy and Social Science of Hunan Province (No. 19YBQ023).