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Housing presale systems and entrepreneurial default risk

Author

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  • Huang, Xianjing
  • Huang, Zhigang
  • Nie, Keyu

Abstract

This paper develops a general equilibrium model that integrates China’s real estate presale system with entrepreneurial default risk. We demonstrate that declining housing demand weakens entrepreneurs' balance sheets, elevating default probabilities. While the presale system mitigates price volatility in response to demand shocks compared to non-presale systems, it simultaneously increases real estate firms’ financial vulnerability. Furthermore, the presale system facilitates the diversion of presale proceeds within firms. This diversion of funds amplifies default risk induced by demand shocks by increasing financial leverage. Our policy analysis shows that while targeted bailouts can effectively contain risk, regulatory interventions must be carefully designed to be counter-cyclical, as pro-cyclical rules are found to significantly worsen financial distress during downturns.

Suggested Citation

  • Huang, Xianjing & Huang, Zhigang & Nie, Keyu, 2025. "Housing presale systems and entrepreneurial default risk," Finance Research Letters, Elsevier, vol. 86(PE).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pe:s1544612325020331
    DOI: 10.1016/j.frl.2025.108779
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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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