The asymmetric wealth effects of housing market and stock market on consumption in China

Abstract

We analyze consumption movements as a function of income and wealth (stocks and housing) with data from China from 1999 to 2010 using a panel vector autoregression model. We find that housing wealth has a negative impact on consumption, but the link is minor, so fluctuation in the housing market should not create sharp movements in consumption. House price control policies implemented in China may encourage limited spending on other goods. Moreover, we find an asymmetric response of consumption to stock market changes. There is a positive response to upward stock wealth change, but no response to downward stock wealth change. Because the results indicate that stock wealth, housing wealth, and consumption Granger cause one another, the Chinese government could influence the stock market and consumption through control of housing prices; the government could also foster the development of the stock market so as to attract investment out of housing, which would help control housing prices. Our results using two different measures of housing wealth and two measures of consumption suggest caution is necessary to avoid inflated wealth effect estimations if inappropriate variables are selected.

Keywords:

• stock wealth
• housing wealth
• housing policy
• China
• wealth effect

JEL classification:

• E21
• R30
• R20

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. The sample includes: (for cities) Beijing, Chongqing, Shanghai, Tianjin; and (for provinces) Anhui, Fujian, Gansu, Guangxi, Guangdong, Guizhou, Hainan, Hebei, Heilongjiang, Henan, Hubei, Hunan, Jiangsu, Jiangxi, Jilin, Liaoning, Ningxia, Qinghai, Shaanxi, Shandong, Shanxi, Sichuan, Tibet, Xinjiang, Yunnan, Zhejiang, and Inner Mongolia.

2. After the founding of the People’s Republic of China in 1949, the new government confiscated property owned by the Kuomintang government and bureaucratic capitalists, establishing the foundation for a state-owned real estate system in China in which almost all real properties were owned by the government. Prior to 1980, China adopted a welfare housing system, whereby the government distributed housing to occupants and the only option for homeownership was through this welfare-oriented public housing distribution. The private house-building industry was eliminated. Senior leader Xiaoping Deng called for market reforms, starting the transition of the Chinese housing system from a welfare-oriented housing system to a market-driven one. This market-based system has been implemented in several stages. Homeownership promotion experiments were conducted in selected cities beginning in 1979, but it was not until 1988 that China launched the reform on a national basis. After delays due to political problems, the Chinese Government formally announced the end of welfare housing allocation in 1998. Since then, homeowners must buy housing in the open market.

3. Disposable income refers to the income at the disposal of members of the households that can be used for final consumption. This equals total income from all sources minus tax, personal contribution to social security, and subsidy for keeping diaries for being a sample household.

4. In our study, the results for non-time-demeaned and time-demeaned data are very close, so we only report empirical results based on time-demeaned data. Results for non-time-demeaned data are provided upon request.

Additional information

Notes on contributors

Xiaorong Zhou

Xiaorong Zhou is currently an associate professor in the School of Public Finance and Taxation, Southwestern University of Finance and Economics. Her research area covers Housing, REITs, and listed real estate firms.

Meng-Shiuh Chang

Meng-Shiuh Chang was an associate professor in the School of Public Finance and Taxation, Southwestern University of Finance and Economics, and is currently an associate professor in Institute of Poyang Lake Eco-economics, Jiangxi University of Finance and Economics. He has published widely on econometrics with particular focus on nonparametric statistics.

Karen Gibler

Karen M. Gibler is associate professor of real estate at Georgia State University and visiting associate professor at the University of the Witwatersrand. Her research covers real estate topics in the USA, China, Finland, Korea, and Spain focusing on corporate real estate management and housing. She was recognized with the International Real Estate Society 2015 Achievement Award.