Housing Returns, Precautionary Savings and Consumption: Micro Evidence From China

Posted: 23 Feb 2021

See all articles by Xuefeng Pan

Xuefeng Pan

University of International Business and Economics (UIBE) - School of Banking and Finance

Weixing Wu

University of International Business and Economics (UIBE)

Date Written: October 31, 2020

Abstract

We investigate how changes in home prices affect consumption in China via a wealth channel. Examining a panel of 7955 households via fixed effects and instrumental variable methods, we find a marginal propensity to consume out of housing wealth (home-price MPC) that is concentrated on goods consumed for pleasure rather than necessity. This trend is driven by the value of second homes rather than that of primary residences, suggesting a wealth channel. We further examine whether returns on housing investment, including rental income and home appreciation, fund the wealth channel; however, we find little supporting evidence. In contrast, a reduction in health risk increases the home-price MPC, but a reduction in income risk that also relieves precautionary saving motives does not. Our results are robust to alternative data, common-factor progress, expenditure shocks and bequest motives. We contribute by examining second homes, which carry little of the dual nature of housing that primary residences do, to identify a controversial wealth channel, and by studying the relative effects of health and income risks on the wealth channel.

Keywords: Home price; Consumption; Housing return; Precautionary saving

JEL Classification: D12; D14; G21; R31

Suggested Citation

Pan, Xuefeng and Wu, Weixing, Housing Returns, Precautionary Savings and Consumption: Micro Evidence From China (October 31, 2020). Journal of Empirical Finance, Vol. 60, No. 1, 2021, Available at SSRN: https://ssrn.com/abstract=3756147

Xuefeng Pan (Contact Author)

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Weixing Wu

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

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