How do housing prices affect consumption in China? New evidence from a continuous wavelet analysis.

In this paper, we revisit the relationship between housing prices and consumption in China by using a continuous wavelet analysis. This method provides an insight into the dynamic nexus in both time and frequency domains. In general, Empirical results show that there is a positive relationship between the two series in China, although it varies across time and frequencies. First, we find that disposable income is the core factor which affects both consumption and housing prices in China. Second, housing prices have a weak wealth effect on consumption in most time. High housing ownership and proportion of housing asset in the total household asset lead to a wealth effect of housing prices on consumption. Third, in the long term, there is a significant wealth effect of housing prices on consumption, but it weakens after 2008, which implies that excessively high housing prices in recent years have partially constrained residents' consumption. These findings have important implications for seeking housing market regulation and expanding domestic consumption decisions.