IDEAS home Printed from https://ideas.repec.org/p/red/sed017/1217.html
   My bibliography  Save this paper

Liquidity Constraints, Transition Dynamics, and the Chinese Housing Return Premium

Author

Listed:
  • Yu Zhang

    (Princeton University)

Abstract

Home price movements received increasing academic and public attention in recent years. In this paper, I propose a novel explanation for large housing booms in emerging markets that highlights the effect of household wealth accumulation on housing prices under liquidity constraints, using the recent Chinese housing boom as an example. In China, housing prices grew 170% during 2003–2012 in real terms. Returns on housing commanded a 12% premium annually over the risk-free rate. Across Chinese cities, increases in the value of housing are closely associated with increases in household wealth, whether measured with or without housing. I argue that the high Chinese housing return premium results from an upward transition in household wealth from a low initial condition interacted with liquidity constraints. Specifically, low initial household wealth, under liquidity constraints, limits housing prices to be low in 2003; but as household wealth quickly rises aided by high household savings, housing prices also quickly increase. I quantitatively assess this explanation using an otherwise standard consumption-housing two-asset dynamic portfolio choice model, augmented with realistic liquidity constraints and low initial wealth, with housing priced in industry equilibrium. The model matches the high housing return premium and explains 92% of the observed increase in housing prices. The model also generates other intriguing predictions, including an investment motive that helps explain the high Chinese household saving rate puzzle. It also predicts that a permanent slowdown in Chinese economic growth might only lead to a temporary dip in Chinese housing prices. The analysis in this paper also provides insights for understanding other episodes in emerging housing markets for which there are both liquidity constraints and low initial household wealth.

Suggested Citation

  • Yu Zhang, 2017. "Liquidity Constraints, Transition Dynamics, and the Chinese Housing Return Premium," 2017 Meeting Papers 1217, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1217
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2017/paper_1217.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Garriga, Carlos & Tang, Yang & Wang, Ping, 2014. "Rural-Urban Migration, Structural Transformation, and Housing Markets in China," Working Papers 2014-28, Federal Reserve Bank of St. Louis, revised 21 Apr 2016.
    2. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2011. "Winners and Losers in Housing Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 255-296, March.
    3. Wu, Jing & Gyourko, Joseph & Deng, Yongheng, 2016. "Evaluating the risk of Chinese housing markets: What we know and what we need to know," China Economic Review, Elsevier, vol. 39(C), pages 91-114.
    4. Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, August.
    5. Edward Glaeser & Wei Huang & Yueran Ma & Andrei Shleifer, 2017. "A Real Estate Boom with Chinese Characteristics," Journal of Economic Perspectives, American Economic Association, vol. 31(1), pages 93-116, Winter.
    6. Wu, Guiying Laura & Feng, Qu & Li, Pei, 2015. "Does local governments’ budget deficit push up housing prices in China?," China Economic Review, Elsevier, vol. 35(C), pages 183-196.
    7. Chao He & Randall Wright & Yu Zhu, 2015. "Housing and Liquidity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 435-455, July.
    8. Chadwick C. Curtis & Nelson Mark, 2010. "Business Cycles, Consumption and Risk-Sharing: How Different Is China?," NBER Working Papers 16154, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Song, Zheng (Michael) & Xiong, Wei, 2018. "Risks in China’s financial system," BOFIT Discussion Papers 1/2018, Bank of Finland, Institute for Economies in Transition.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed017:1217. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.