Housing prices and consumption : the case of China

The rapid soaring housing prices in Chinese residential property market have attracted increasing worldwide attention in recent years. Facing the rising concerns about both the stability and sustainability of Chinese housing market prices dynamics, this study aims at investigating the impacts of changes in housing wealth on consumption in China. Previous studies on this subject usually use country level data with relatively shorter sample period, or individual time series for a single or a few cities. Recent development in literatures suggests that panel data have the more heightened capacity for modeling the complexity of human behavior than a single cross-section or time series data can possibly allow. In this study, in order to identify both long-term and short-term elasticity of consumption with respect to housing wealth, panel framework of ECM is constructed, with quarterly data from 23 cities throughout China, covering the period of 2005Q1-2010Q4. The estimation results confirm large and highly significant positive housing wealth effect on consumption in both long-run and short-run for China. Furthermore, due to the potential endogeneity problem driven by the fact that housing prices are highly correlated with income, instrumental variable estimations are also implemented. The resulting empirical findings confirm that changes in housing values can exert large and positive impacts on household consumption, even after this potential endogeneity bias is controlled for