Effects Of Interest Rates On Urban Housing Demand:Evidence From China’s Housing Market (Mainland Only)

This research studies the impact of interest rates on China (mainland)’s housing demand in urban housing market. The year of1998is always viewed as the starting year of China (mainland)’s urban housing market. By studying the housing sales data starting from1998, we can find that there is only one decrease, arising in2008, of housing demand through the history of urban housing market. This means in the years except2008, urban housing demand is always increasing. However, from2004to2007, interest rates also keep increased. Especially in2007, there are6increases of interest rates by China’s central bank. It seems that interest rates have no impact on urban housing demand, which brings the doubt on the effectiveness of government’s interest rate intervention in the housing market.This research empirically studies the impact of interest rates on China’s urban housing demand by using a panel data of31provinces of mainland China, after reviewing housing demand theories and the history of China’s urban housing demand, and also studying the mechanism of interest rates’impact on housing demand. There are four main results of the empirical study. Firstly, interest rates can strongly and negatively affect housing demand. However the negative impact is small in degree compared with the positive impact of population or income. Secondly, the rising population and income are the main reasons for the increase of China’s urban housing demand. The positive impact of population and income is very strong and big. Thirdly, households’prediction on housing price can affect housing demand strongly. Fourthly, instrumental variable method is adopted to find that the potential endogeneity problem of interest rates is not serious.With the empirical results, the effectiveness of interest rate intervention in the housing market is further discussed. There are two reasons attributing to the fact that interest rate intervention looks like workless. Firstly, the negative effect of interest rate is offset by the positive effect of population and income. Secondly, interest rate policy has time lag problem.The main contributions of this study to literature have three aspects. Firstly, this research carefully studies the way how different kinds of interest rates affect housing demand. Secondly, this research adopts an instrumental variable method to examine the endogeneity problem of interest rates. Thirdly, the empirical results of this study can offer some clues to explain the phenomenon of workless interest rate intervention.