An Empirical Research On The Impact Of Housing Price Fluctuation On Household Consumption In China:Considering The Business Cycle

Since the revolution of housing in 1998, China’s urban housing began tocommercialization. The price of house keeps growing after revolution. As a dividingpoint , housing price increased slowly from 1999 to 2003 and fastly from 2004 to2011. Housing price is 2715￥in the second quarter of 2004,but it is 5391￥in thesecond quarter of 2011.The annual average growth rate is 10.3%.According to the permanent income hypothesis, the fluctuation of housing pricewill effect on resident’s permanent income, which will affect resident’s consumptionexpenditures. In addition, consumption expenditures increase as incomes increase inChina , but the consumption rate is indeed reduced year by year.Recently there have been a lot of pappies that study the relationship betweenhousing wealth and consumption, however, these studies do not take into account theeconomic cycle changes in dynamic relationship of .housing wealth and consumption.Different with previous researches in the field, this paper quantitatively analyzeshousing wealth’s effect on consumption in different states of the economy.Even though the economic cycle is determined by many economic factors,consumers can change their consumption decision depending on different economicstates they are being now.So an empirical research on the impact of housing price onhousehold consumption in china :considering the business cycle. The result showsdifferent about housing wealth in different states of economic. Due to theshortcomings of the Markov switching model, this article uses vector error correctionmodel (VECM)with dummy variables (economic expansion and contraction phase). Estimated vector error correction model with dummy variables, in differentperiods of economic, housing price wealth effect is also different. In the boom period,housing price growth rate increases 1%, the consumption growth rate will increase by0.451%. In the recession period, housing price growth rate increase 1%, consumptiongrowth rate will drop about 0.169%. According to the estimated results of this work,housing wealth is not only related to the change of the housing price itself, but alsowith the consumers’ expectations of the economic cycle.