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Informal borrowing and home purchase: Evidence from urban China

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  • Fan, Ying
  • Wu, Jing
  • Yang, Zan

Abstract

In this paper, we provide a new explanation for the co-existence of huge housing demand and low dependence on mortgage loans in urban China, focusing on the effect of households’ informal borrowing from relatives and friends. Empirical analysis based on a national-level household survey suggests that because of the low financial cost of informal borrowing, households tend to borrow as much as possible from informal channels until they reach the constraint determined by their social capital, which significantly crowds out formal borrowing such as mortgage loans from commercial banks. Additionally, the existence of informal borrowing significantly increases households’ housing demand. Understanding these effects is especially important in regions with less mature financial systems.

Suggested Citation

  • Fan, Ying & Wu, Jing & Yang, Zan, 2017. "Informal borrowing and home purchase: Evidence from urban China," Regional Science and Urban Economics, Elsevier, vol. 67(C), pages 108-118.
    • Handle: RePEc:eee:regeco:v:67:y:2017:i:c:p:108-118
    DOI: 10.1016/j.regsciurbeco.2017.09.003
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    Cited by:

    1. Zan Yang & Ying Fan & Liqing Zhao, 2018. "A Reexamination of Housing Price and Household Consumption in China: The Dual Role of Housing Consumption and Housing Investment," The Journal of Real Estate Finance and Economics, Springer, vol. 56(3), pages 472-499, April.
    2. Piotr Bialowolski & Dorota Weziak‐Bialowolska, 2021. "Good credit, bad credit: The differential role of the sources of debt in life satisfaction," Journal of Consumer Affairs, Wiley Blackwell, vol. 55(3), pages 967-994, September.
    3. Fan, Ying, 2022. "Demand shocks and price stickiness in housing market dynamics," Economic Modelling, Elsevier, vol. 110(C).

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    More about this item

    Keywords

    D14; G21; E26; Informal borrowing; Social capital; Housing demand; China;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy

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