Tightening belts to buy a home: Consumption responses to rising housing prices in urban China

This paper measures the impact of housing price changes on household consumption at the city level using the universe of credit and debit card transactions in China from 2011 to 2013. In sharp contrast to the literature on the US housing market, our analysis shows a large and negative housing price elasticity of consumption: a 10% increase in housing prices would lead to a 9% reduction in non-housing spending. We argue that the negative elasticity is driven by the combination of a strong investment incentive in housing and heavy borrowing constraints faced by households. This finding is corroborated by the fact that households increase their savings as housing prices increase. Our analysis suggests that the negative impact of housing price increases on consumption was an important factor behind the low growth rate in household consumption relative to the growth of disposal income during the sample period.