Housing Price and Consumer Spending: An Asset Allocation Approach

Abstract

This paper is to analyze how housing prices affect the consumption of urban households in China based on their asset allocations. We first identify household types based on their liquid and illiquid assets allocations, and in particular, a group unique to China named poor non-hand-to-mouth households, who save much of their incomes for buying houses in succeeding years due to high minimum down payment. We then show both theoretically and empirically that different groups of households based on asset allocations have sharp implications for wealth, substitution and liquidity constraint effects when housing prices change, of which the liquidity constraint the effect is most prominent to the poor non-hand-to-mouth households and leads to their much smaller MPC compared to other types of households. Finally, we show our methodology leads to a more precise estimation of consumption movement due to fluctuations of house prices by taking into account both the intensive and extensive margins.