Flight to Housing in China

Abstract

We empirically detect the flight to safety vis-a-vis housing in China: Great economic uncertainty causes the prices of housing assets to soar. To stabilize housing prices, China has imposed purchase restrictions on the housing market. We study the aggregate and distributional effects of this housing policy by developing a two-sector model with heterogeneous households. An uncertainty shock generates a countercyclical housing boom by shifting outward households' demand for housing as a store of value. A vibrant housing sector then leads to an economic recession by crowding out resources that could have been allocated to the real sector. Our quantitative analysis suggests that the policy limiting housing purchases effectively curb surging housing prices. However, the policy restricts households' access to housing that can be used to buffer idiosyncratic uncertainties, creating a larger consumption dispersion. Consequently, the housing policy creates a trade-off between macro-level stability and micro-level consumption risk sharing.

Keywords: Heterogeneous Households, Store of Value, Housing Policy, Aggregate and Distributional Effects, Consumption Risk Sharing.

JEL Classification: E21, G11, G18, H31, R21