Incomplete Financial Markets and the Booming Housing Sector in China

Incomplete Financial Markets and the Booming Housing Sector in China
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Volume/Issue: Volume 2020 Issue 265
Publication date: December 2020
ISBN: 9781513561639
$18.00
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Topics covered in this book

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Finance , Economics- Macroeconomics , Chinese housing , COVID-19 , Financial market incompleteness , DSGE , WP , financial market , consumption goods , housing investor , mortgage loan-to-GDP ratio , demand and supply channel , housing demand , rental market clearing , Housing , Housing prices , Consumption , Securities markets , Mortgages , Global

Summary

Housing is by far the most important asset in Chinese households’ balance sheets. However, despite forceful and frequent government interventions, the rise in Chinese housing prices has not been contained as much as intended, a trend that has not been reversed by the COVID-19 shock. In this paper, we first provide some stylized facts and then a DSGE model (encompassing both demand and supply channels) to highlight the impact of a “slow-moving” structural vulnerability—financial market incompleteness—on China’s housing prices. The model implies that to eradicate the root causes of the rising housing price, policymakers need to go beyond the housing market itself; instead, it would be desirable to deepen financial markets because these markets would help channel financial resources to productive sectors rather than to housing speculation. This is particularly important in the COVID era because without addressing this structural vulnerability, the higher household savings and the government stimulus may fuel the housing bubble and sow seeds for a future crisis. The paper can also shed light on the housing markets in other economies that face similar vulnerabilities.