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Housing and Saving with Finance Imperfection

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  • Yanbin Chen

    (School of Economics, Renmin University of China)

  • Fangxing Li

    (School of Economics, Renmin University of China)

  • Zhesheng Qiu

    (Department of Economics, University of Pennsylvania)

Abstract

In this paper, we construct a life cycle model with housing demand and incomplete market to explore the relationship between housing demand, accompanied with underdeveloped housing finance, and the household saving rate in China. We investigate two types of finance imperfection: a) the high down payment ratio required by central bank, and b) the unsmooth home equity withdrawal due to the prohibitive nature of refinancing. Without access to home equity withdrawal, households have to hold a considerable amount of non-housing asset such as deposit, cash, and bond as it is difficult for them to insure against negative income shocks and retirement via housing asset. . This helps to account for the rising household saving rate during the past 10 years in China where commercialized housing market had been emerging. Yet interestingly on another note, we find higher down payment ratio leads to a substitution between housing and non-housing assets, leaving the aggregate household saving rate almost unchanged.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 14 (2013)
Issue (Month): 1 (May)
Pages: 207-248

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Handle: RePEc:cuf:journl:y:2013:v:14:i:1:chen:li:qiu

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Keywords: Housing; Saving; Down payment; Home Equity Withdrawal;

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