Housing returns, precautionary savings and consumption: Micro evidence from China

• Published in: Journal of empirical finance Vol. 60; pp. 39 - 55
• Main Authors: Pan, Xuefeng, Wu, Weixing
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.01.2021
• Subjects: Consumption; Home price; Housing return; Precautionary saving; Consumption; Housing return; R31; D12; D14; G21; Home price; Precautionary saving
• ISSN: 0927-5398; 1879-1727
• DOI: 10.1016/j.jempfin.2020.10.006

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.