Wealth Effect Of Residential Houses In China

Wealth effect of residential houses refers to the effect of houses price change on residentialconsumption expenditure. In theory, the paper analyzes transmission mechanism of wealth effectof residential houses in perfect market, liquidity constraint effects in imperfect market andinverted U-shaped curve of wealth effect. After constructing the empirical model, the provincialpanel data from1990to2010are used to check wealth effect of residential houses and liquidityconstraint effects in china.The theoretical and empirical results mainly imply four points. Firstly, wealth effect ofresidential houses is significantly positive, and the rise of one unit’s houses price can bringincremental consumption of0.0283unit. Residential ownership rate is very high in China, wealtheffect would be an important part of property income. Secondly, the underdevelopment offinancial market causes external liquidity constraint. The regions of higher financial development,namely, lower external liquidity constraint, exhibit larger wealth effect of residential houses.Thirdly, the quantities of households’ liquid assets affect internal liquidity constraint. There existsinternal liquidity constraint based on the behavioral theory of life-cycle, as high saving ratesuppresses wealth effect of residential houses. Fourth, wealth effect of residential houses exhibitsincurved U-shaped curve, as excessive rising of houses price can choke domestic demand.Finally, in order to give play of positive wealth effect, the paper makes policy proposal ofdeveloping financial market, expanding residential investment channels, improving the socialsecurity system and establishing social regulation mechanism of residential houses.