EconomicsSeminar( 2019-09)

Topic: AGGREGATE AND DISTRIBUTIONAL IMPACTS OF HOUSINGPOLICY: CHINA'S EXPERIMENT

Speaker: Kaiji CHEN,Emory University

Time: Tuesday, June 11, 13:30-15:00p.m

Place: Room 217, Guanghua Building2

Abstract:

What's the role of credit conditions in housing booms and busts and what arethe distributional consequences of housing booms and busts across households of differentcharacteristics? In this paper, we take China's recent changes in housing policy as an ex-periment to address these two key issue. During 2014Q4-2016Q3, China relaxed its housingpolicies by reducing the minimum down payment ratio of non-primary houses from 60-70percent to 30 percent. By exploiting two unique micro-level data sets, wefind that thatthis policy change induced a significant increase in mortgage credit demand among high-educated middle-aged households, while crowding out mortgage credit to young households.Moreover, consumption growth by middle-aged high-educated households slowed down following this policy change. To quantify the aggregate and distributional impacts of this policychange, we construct an overlapping-generations economy with household heterogeneity andcalibrate it to match various aggregate and cross-sectional moments of China. Our policyexperiment suggests that a cut in the minimum down payment ratio for non-primary housesinvolves a self-enforcing effect on housing demand via equilibrium housing price: a reductionin the down payment ratio for non-primary housing triggers an initial housing price increase.This, in turn, generates capital gains for existing homeowners when the policy change andallows them to switch to a larger house by overcoming the credit constraint for housinginvestment. Such a process is self-enforcing via the equilibrium housing prices due to theinteraction between stronger housing demand and higher housing price.

Introduction

Kaiji Chen is currently tenured associate professor at Emory University and senior research fellow of Federal Reserve Bank of Atlanta. His main research fields are macroeconomics and financial economics. He has published in top economic journals, such as American Economic Review, NBER Macroeconomic Annual, American Economic Journal: Macroeconomy, and Journal of Monetary Economics. His paper “The Great Housing Boom of China,” was awarded the 3rd Sun Yefang Financial Innovation Award in 2018.

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