Research On Housing Market’s Wealth Effect On Consumption In China

This paper empirically studies the relationship between housing prices and consumption, to recommend reasonable suggestions on improvement of consumption in China. First, We build a dynamic local equilibrium model without habit formation and with two types of agents. Based on this frictionless model, we derive the Euler equation of the aggregate consumption to analysis the volatility of housing prices on consumption. Second, we consider the sluggishness of consumption behavior, add habit formation to frictionless model get habit model. Based on habit model we re-estimate the relationship between housing prices and consumption. With the consideration of our model, we use the panel data in31provinces(municipality directly under the central government, autonomous region) from1998to2012, we then use CCE method proposed in Pesaran(2006) to estimate the parameters of the Euler equation in frictionless model an use CCEMG method to estimate the parameters of the Euler equation in habit model. Holding the other conditions standstill, our empirical results demonstrate that in frictionless model, if housing prices increase by1%, then the consumption will decrease0.0194%. For the reason that the volatility of housing prices is4.54times of consumption’s volatility, hence housing prices has clear effects on consumption. As the housing prices increase by7.66%annually, our results implicate that the increase of housing prices has made the0.1486%decline of the consumption and the aggregate affect from1999to2012is reach to2.08%. The results of frictionless model are robust to the different calculation approaches of inflation and alternative indexes of interest rates. The result of frictionless model indicates that the increase of housing prices has a significantly negative influence on the expenditure of household consumption.When we add habit formation to frictionless model, the growth rate of interest rates and housing prices still have negative impacts on consumption, but the statistical results are not significant. The habit model suggests that permanent income and consumption habits are the significant factors to the expanding of household consumption. At the end of this paper, we recommend some proposals, which are on the basis of models’ structure and empirical results.