Mortgage Slavery Outweighs Wealth Effect for Chinese Homeowners

Analysts at Oriental Securities compare China's real estate market to the U.S. and see parallels. Although they find China hasn't yet reached the levels of financialization seen ahead of 2008, many households are already constrained by their mortgages such that they do not experience a wealth effect from rising prices.

iFeng: 被金融裹挟的房地产:房奴效应大于财富效应
From the dynamic path of leverage in China's physical sector, the resident sector has been increasing leverage since 2008. In 2008, the debt leverage ratio of the resident sector was 18.77%, and it rose to 55.30% in the second quarter of 2019, an average annual increase of 3.3 percentage points.

The most important reason for the rise in housing prices is the rise in housing prices. People only talk about the wealth effect, but they ignore the “house slave effect”. The latter refers to the increase in housing prices and the increase in residents’ housing and rental expenses.

Empirical studies show that China is a house slave effect greater than a wealth effect. While rising house prices have increased the debt burden of the residential sector, they have also suppressed consumer demand and squeezed out investment in the physical sector, hindering productivity. It is the realization of the negative effects brought about by the excessive expansion of the real estate market. The "7·30" Politburo meeting not only re-emphasizes the positioning of "staying and not speculating", but also for the first time clarifying that "real estate is not a means of stimulating the economy in the short term." But from the latest data on real estate transactions and prices, market inertia is still significant.

From the analysis of this paper, we can see that from the perspective of realizing the policy objectives of real estate regulation, one way to refer to is to constrain the financial properties of real estate. The commercialization and financialization of China's real estate began in 1998. If China's real estate market is compared with the United States, China is still in the early stages of financialization. If real estate is left with financial development, then the story of the United States in 2008 is likely to repeat itself in China.

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