Incomplete Financial Markets and the Booming Housing Sector in China

December 4, 2020

Preview Citation

Format: Chicago

Tamim Bayoumi, and Yunhui Zhao. Incomplete Financial Markets and the Booming Housing Sector in China, (USA: International Monetary Fund, 2020) accessed December 26, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

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

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/265
Stock No:

WPIEA2020265
ISBN:

9781513561639
ISSN:

1018-5941

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