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Housing and Saving with Finance Imperfection

Author

Listed:
  • Yanbin Chen

    (School of Economics, Renmin University of China)

  • Fangxing Li

    (School of Economics, Renmin University of China)

  • Zhesheng Qiu

    (Department of Economics, University of Pennsylvania)

Abstract
In this paper, we construct a life cycle model with housing demand and incomplete market to explore the relationship between housing demand, accompanied with underdeveloped housing finance, and the household saving rate in China. We investigate two types of finance imperfection: a) the high down payment ratio required by central bank, and b) the unsmooth home equity withdrawal due to the prohibitive nature of refinancing. Without access to home equity withdrawal, households have to hold a considerable amount of non-housing asset such as deposit, cash, and bond as it is difficult for them to insure against negative income shocks and retirement via housing asset. . This helps to account for the rising household saving rate during the past 10 years in China where commercialized housing market had been emerging. Yet interestingly on another note, we find higher down payment ratio leads to a substitution between housing and non-housing assets, leaving the aggregate household saving rate almost unchanged.

Suggested Citation

  • Yanbin Chen & Fangxing Li & Zhesheng Qiu, 2013. "Housing and Saving with Finance Imperfection," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 207-248, May.
    • Handle: RePEc:cuf:journl:y:2013:v:14:i:1:chen:li:qiu
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    References listed on IDEAS

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    More about this item

    Keywords

    Housing; Saving; Down payment; Home Equity Withdrawal;
    All these keywords.

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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