Rising Household Leverage in China Driven By Real Estate

Similar to the economic models that ignore debt because it all washes out (one man's debt is another man's asset), there's no need to worry about rapidly increasing household leverage in China because it is backed by rising home prices.

Compared to the level of leverage in itself, we are more concerned about marginal changes in leverage. Since 2008, China leveraged household sector's rapid rise from less than 20% to 39.5% by the end of 2015, we estimate the end of 2016 will reach 43% -44%. Each round of home price increases (in 2009, 2013 and in June 2015 to date) is accompanied by rising household sector leverage, and when housing prices are stable, the leverage ratio also remained stable overall. 2014 to 2015 is an exception, price correction, cooling the property market, but the leverage still rising, possibly caused by the increased stock market leverage.

Household Leverage Ratio

Rising home prices are killing consumption as the wealth effect is swamped by substitution. The only time consumption showed signs of real life was 2013, when home price increases were decelerating.

Since 2002, housing prices continued to rise, while residents average propensity to consume all the way down. Beginning in 2002, Chinese prices began rising, although several adjustments during the adjustment but far less than the previous increase, making the overall housing prices or rising, or consolidation, deep price correction only in the fourth quarter of 2008 2009 first quarter, the third quarter of 2014 to the first quarter of 2015 had. High prices on household consumption has a significant inhibitory effect, prices continued to rise, while residents average propensity to consume all the way down, suggesting that consumer prices rose for the substitution effect is greater than the wealth effect. .

It is noteworthy that in 2013 the average propensity to consume and the price trend change occurs in the same direction. 2013 70 cities housing prices overall rose 9.27%, but the data show that the average propensity to consume has rebounded significantly. In fact, this is because the 2013 Chinese consumer spending statistics caliber made a major adjustment, the implicit rent of owner-occupied housing are included in the statistics, consumer spending in the residential entry substantial increase over 2012, 2013 and 2012 consumption expenditure data are not comparable.

Home prices must fall as a share of consumption, either through a nominal or a real price declines. The government doesn't want a nominal price decline.

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