Research On The Causes Of The Rapid Rise Of Household Leverage And Its Effect On Consumption In China

In light of the lessons learned from the 2008 financial crisis,countries have been on high alert for high macroeconomic leverage.In China's case,the macroeconomic leverage ratio has also experienced a rapid rise since 2008,and the authorities have begun to formulate policies to deal with this.However,the focus of policy formulation and implementation has been on the corporate and government sectors,and the high leverage of the household sector seems to have been overlooked,whereas this was in fact an important factor in the outbreak of the subprime crisis in the US,as many Western scholars have concluded.In fact,the leverage ratio of the Chinese household sector,as measured by the ratio of debt to disposable income,has been rising in recent years(with housing-related debt being the most important component of household leverage)and has reached a level that requires vigilance.In particular,the study of the risks inherent therein and how to prevent them is of great realistic significance for maintaining the smooth and healthy development of the Chinese economy during the transition period,which is the starting point of this paper.Statistically,the leverage ratio(debt/disposable income)of the Chinese household sector has reached a level that requires alarm.It is worth noting that,following the nationwide real estate stimulus policies introduced at the end of the third quarter of 2014,house prices and household sector leverage rose at an accelerated pace(with housing-related debt being the most important component of household leverage),and as the real estate market became increasingly prosperous,the ratio of increase in household sector leverage also accelerated significantly.The link between Chinese households' house purchase decisions(rigid or speculative)and changes in leverage,as reflected in the continued downturn in consumption,may be key to understanding the risks of high households' leverage in China.This paper follows the logic of “typical facts — cause of leverage rapid rising— direct impact on consumption – linkages with other sectors — mechanisms of risk formation — policy responses”,emphasized the combination of empirical research and theoretical models.Statistically,the movement of China's household sector leverage in recent years has shown three typical facts: First,the continued rise in household sector leverage has been in line with the rising trend in house price,especially after the nationwide real estate stimulus policies introduced at the end of the third quarter of2014,the household sector leverage has been rising at an increasingly rapid pace,with the growth rate even exceeding that of house price itself.Second,the rising leverage of the household sector was accompanied by a persistent downturn in consumption,especially after the introduction of the real estate stimulus,and the divergence between the two trends became more pronounced.Thirdly,the link between the motivation of Chinese households to purchase a house(rigid or speculative purchase)and their decision to leverage,as reflected in the surge in average mortgage lending by households purchasing non-first house,which significantly exceeded those purchasing first house following the introduction of the real estate stimulus,may be key to understanding the problem of high household leverage in China.Based on these,in terms of elucidating the reasons for the rapid rise in household sector leverage,this paper constructs an optimal housing choice model that shows that households buying non-first house will leverage significantly more than those buying first if house prices are expected to rise,due to the increase in households buying speculatively.And then empirical evidence for this theoretical hypothesis was provided using 2016 data on all residential housing mortgage loans in 70 large and medium-sized cities of a state-owned bank: during a housing market boom(when households expect house prices to rise significantly),households buying non-first house do leverage significantly more than those buying first,and they are more inclined to make extreme use of mortgage limit policies.This suggests that as the housing market booms,the proportion of speculative purchases increases for homeowners,which accelerates the rise in household sector leverage.On this basis,the paper further explores the link between rising household leverage and the sluggish consumption in China.Empirical studies using the CHFS survey data have found that the higher the household leverage,the greater the decline in consumption,and that it is leverage related mainly to housing debt dampened consumption.As the housing market entered a boom,households buying non-first house significantly reduced their consumption due to reduced liquidity.Based on this empirical evidence,this paper further explains the mechanism of influence by constructing a heterogeneous agent model: a booming housing market makes households expect a rapid rise in house prices in the future,and the increase in speculative purchases of non-first house increases the leverage ratio and further reduces liquidity,increasing the dampening effect of high leverage on consumption in the household sector.Finally,this paper establishes the link between household leverage and the real estate sector as well as the government sector by extending the local equilibrium model focusing on the household sector to a general equilibrium model.The mechanism of the formation of high household leverage risk is clarified by introducing an exogenous negative productivity shock.It turns out that the higher the leverage accumulated by the household sector,not only does consumption fall further and more,but also house prices,as well as other sectoral economic indicators,fall to a greater extent,and it is worth noting that this negative impact becomes particularly pronounced in situations where speculative house-buying households are present in the previous period.This is due to the fact that the higher the leverage,the higher the debt burden borne by households,which would have depressed consumption.And households that had previously bought “at the margin” as a result of the real estate stimulus(as many speculative purchases were)will not be able to withstand the negative productivity shock when it occurs and will have to sell their house,and this changes the supply and demand relationship in the housing market,bringing down equilibrium house price,which in turn brings down investment and government revenues,which together can cause a recession in aggregate output.Based on this,this study argues that effective protection against the risk of high household leverage requires not only curbing the rapid rise in leverage during the housing market boom,but also relieving the debt burden of households already carrying mortgages.This paper evaluates the effects of three policies—setting liquidity requirements for non-first house buyers,reducing the personal income tax burden and providing debt relief for households with debt.While the first policy aims to limit borrowing by speculative house-buying households during the housing market boom,the effect of the latter two policies is essentially to reduce the debt servicing burden of households.When implemented together and coordinated,the three policies can maximise the effect of preventing the risk of high household leverage.On the basis of these findings,this paper further suggests that a number of complementary measures are needed to improve the efficiency of the implementation of these policies in reality.The main contribution of this paper lies in the combination of empirical and theoretical research,which provides an in-depth study of the causes of the problem of high household leverage in China and its implications.Compared with existing relevant studies,the innovations of this paper are mainly reflected in the following three aspects:Firstly,it expands the perspective of studying the problems associated with household leverage in China by highlighting the fact that Chinese households make different decisions to 'leverage up' given different motivations for house purchase,and thus linking these differences in decisions to the rapid increase in household sector leverage.A heterogeneous perspective on the motivations for house purchase,distinguishing between households' rigid house purchase decisions and speculative house purchase decisions,and identifying whether there are significant differences in the leverage behaviour of households in these different decisions,may better explain the typical facts presented by the statistics.Second,it links the persistent downturn of consumption in China to rising household leverage and explores the channels through which increased household leverage depressed consumption,analysing in particular the mechanisms by which household consumption changes around the time when the housing market enters a boom period for the purchase of non-first house.China's macroeconomy exhibits characteristics of a decline in consumption growth that has already occurred in the absence of a crisis.On this basis,the relationship between the rapidly climbing leverage of the household sector and consumption,which is the focus of this paper,may be more convincing as an explanation for the continued downturn in consumption,as it represents an increase in the debt servicing burden of households.In particular,in the context of a booming housing market,the channels through which the increase in household sector leverage has dampened consumption are all the more noteworthy as a result of the increase in speculative house purchases by households.Thirdly,the theoretical section uses a heterogeneous agent model,a cuttingedge model in the macro field,to innovatively model the heterogeneous house purchase motivation decisions of households in accordance with the central government's spirit of “houses are for living in,not for speculation”,thereby correlating all the different effects of such decision differences on consumption and establishing a link between house purchase motivation,household leverage and other economic sectors.It also establishes the linkages between house purchase motives,household leverage and the rest of the economy,and provides an operational theoretical tool for finding policies that effectively address the risks of high leverage in the household sector.