Incomplete Financial Markets and the Booming Housing Sector in China

IMF Working Papers, December 4, 2020

Source details

Canonical URL: Incomplete Financial Markets and the Booming Housing Sector in China

Housing is by far the most important asset in Chinese households’ balance sheets.
Despite forceful and frequent government interventions, the rise in Chinese housing prices has not been contained as much as intended; this trend has not been reversed by the COVID-19 shock.
The paper provides stylized facts and develops 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.
Without addressing this structural vulnerability, higher household savings and government stimulus in the COVID era may fuel the housing bubble and sow seeds for a future crisis.
The analysis can shed light on housing markets in other economies that face similar vulnerabilities.

Model framework:
- A DSGE model that encompasses both demand and supply channels for housing.
- Emphasizes the role of financial market incompleteness as a slow-moving structural vulnerability.
Mechanisms highlighted:
- Financial market incompleteness channels financial resources toward housing speculation rather than productive sectors.
- Demand-side pressures (including higher household savings) and supply-side conditions interact within the model to drive housing prices upward.
- Policy interventions confined to the housing market are insufficient to eradicate the root causes of rising housing prices.

To eradicate root causes of rising housing prices, policymakers need to go beyond the housing market itself.
Desirable policy direction: deepen financial markets so that financial resources are channeled to productive sectors rather than to housing speculation.
Particular urgency in the COVID era: without financial-market reforms, higher household savings and government stimulus may exacerbate housing-price pressures and increase crisis risk.

Subject: Consumption, Financial institutions, Financial markets, Housing, Housing prices, Mortgages, National accounts, Prices, Securities markets, Stock markets
Keywords: Chinese housing, Consumption, consumption goods, COVID-19, demand and supply channel, DSGE, financial market, Financial market incompleteness, Global, Housing, housing demand, housing investor, Housing prices, mortgage loan-to-GDP ratio, Mortgages, rental market clearing, Securities markets, WP

IMF Working Paper — Tamim Bayoumi, Yunhui Zhao; December 4, 2020; Working Paper No. 2020/265; DOI: https://doi.org/10.5089/9781513561639.001