Abstract/Summary

Weakened domestic demand has been one of the Chinese economy’s major structural problems, and ongoing Sino-U.S. trade frictions and the coronavirus outbreak make the issue of paramount importance. Since 2018, the Chinese government has made it a top priority to support domestic demand and therefore stabilize economic growth. It has done so through tax cuts and direct spending. Boosting domestic consumption seems necessary for China to ease the epidemic’s impact in the short term, respond to anti-globalization in the medium term, and promote sustainable economic growth in the long term. This paper investigates the real effect of housing rents on household consumption. Households can theoretically determine their consumption level and housing rents according to user costs, where housing rent is equivalent to user costs. Considering the marked divergence in housing rents and user costs documented in the literature, we propose that housing rents affect household consumption via the investment effect, the income effect, and the substitution effect in the theoretical framework.We use a unique dataset from the China Family Panel Study(CFPS) to examine the heterogeneous effects of housing rents on household consumption from the years 2012 to 2016. We use average housing rents from the survey to measure a specific region’s housing rent level. Our specification not only allows for the crucial features of the housing market and regional disparity, but also for the interaction of households’ housing tenure choices with their consumption patterns. To mitigate the concern of potential endogeneity between household consumption and housing rents, we adopt the proportion of housing demolition in the corresponding region as the instrument in the robustness check.Our paper documents several interesting patterns regarding housing rents and household consumption. First, our findings show positive household consumption responses to declining housing rents. This indicates that declining rent boosts household consumption in the short term. By controlling household level characteristics such as demographic features and financial status, we find that a 10% decrease in housing rents leads to a 1.2%-4.1% increase in non-housing consumption. Second, the overall effect appears to be driven primarily by the investment effect, with an estimated elasticity of 0.15-0.39 for homeowners. The income effect is estimated with an elasticity of 0.18-0.25. Conversely, the substitution effect(estimated elasticity of 0.21-0.41) dominates the consumption pattern of renters. Third, we document a more pronounced marginal effect in the consumption of non-durable goods such as food, education, and utilities, indicating that income effect and substitution effect have similar impacts across different cohorts of households. Fourth, the above results are robust under different econometric specifications and salient with the lower consumption level when the marginal effect is more of a concern. Finally, we analyze the aggregate impacts of rising rents on private consumption from the perspective of consumption inequality. We document evidence of the Matthew effect on household consumption, which is determined by the household endowment and income level. On average, declining housing rent narrows the consumption inequality gap: a 10% decrease in housing rents leads to a significant decrease of 1.13% in the Gini consumption level.This paper makes several contributions. First, the paper examines the impact of housing rents on household consumption, providing the first piece of evidence of how housing rents affect household consumption via the investment effect, the income effect, and the substitution effect. Second, by further discussing the role of housing rents in consumption patterns, our paper contributes to a broader body of literature examining the effects of real estate wealth on private consumption. Third, this paper analyzes the aggregate impacts of rising rents and documents evidence of the Matthew effect on consumption inequality. Finally, our results provide policy guidance for the government regarding how to support domestic demand by regulating and developing the rental market in China.