Ruili Liao[1], Jidong Chen[2], Yujin Cao[3] and Liutang Gong[4]
Overview
The minimum down payment requirement does not have a significant short-term impact on residents' decisions to rent or buy a home. However, lowering this requirement significantly boosts household consumption, with a particularly pronounced effect on service consumption.
The stimulative effect of easing mortgage restrictions is more pronounced in households with strong home-buying intentions (those with smaller per capita living space), lower wealth levels, or migrant households, indicating that well-designed policies have the potential of improving the welfare of disadvantaged groups.
I. Introduction
In 2022, China’s final consumption rate reached 53.2%, with per capita service consumption accounting for 43.2% of total per capita consumption expenditure, highlighting significant potential for improvement in both consumption levels and quality. Enhancing these aspects not only improves residents' well-being but also strengthens the quality and efficiency of economic development.
At the same time, effectively managing real estate risks and promoting a stable, healthy real estate market are also crucial policy objectives. Balancing these goals—stabilizing the real estate market while fostering consumption upgrades—is essential for ensuring smooth domestic economic circulation.
The primary aim of real estate regulation is to adjust the supply-demand dynamics of housing to ensure stable market growth and mitigate relevant financial risks. From the perspective of "macroeconomic policy orientation consistency”, real estate policies can significantly influence other economic sectors, particularly household consumption. This influence stems not only from the transmitting effect of asset price or regulatory policy changes on consumption decisions, but also from the critical role of housing in household budgets and investment portfolios. Consequently, real estate policies, such as mortgage restrictions specifying minimum down payment requirements, indirectly affect both the level and quality of household consumption.
II. Theoretical Framework and Research Design
To analyze the impact of minimum down payment requirements on household consumption, we propose a two-period intertemporal model of a representative rational household with specific utility functions and wealth constraints. In the first period, the said household makes decisions on consumption, housing (i.e. whether to rent or own a home), and finance (i.e. whether to take out a loan for homebuying or rent and invest). The three decisions together determine the household’s utility and, through the intertemporal wealth-constraints, their financial situation in the second period.
The model reveals a dynamic threshold for the minimum down payment, determined by the relative relationship between interest rates, rent levels, and home prices in both periods. Below this threshold, minimum down payment adjustments do not impact the household’s optimal decision to always purchase a home. For households that always prefer owning a home, the housing elasticity of utility (the degree to which changes in housing quality affect utility compared to changes in consumption) determines the effect of down payment requirements on first-period consumption. High housing elasticity correlates negatively with consumption levels when minimum down payment requirements increase.
Theoretical analysis renders the existence of a dynamic threshold of the legally minimum down payment, determined by the relative relationship between interest rate, rent level, and home prices in both periods. For minimum down payment rates below the threshold, policy adjustments in the minimum down payment would not impact the household’s decision to always purchase a home. When this condition is true and the household always prefers homeownership, their housing elasticity of utility (that is, how much a change in their housing quality effects their utility, relative to a change in their consumption) determines the effect of minimum down payment on their first-period consumption. When housing elasticity of utility is high, the model suggests a negative relationship between minimum down payment and the household’s consumption level.
The microdata used in the empirical part of this study is drawn from the 2013 and 2018 urban household samples of the China Household Income Project Series (CHIPs), covering 15 provinces and 161 cities, and 17,921 household observations. Additionally, the 2012 and 2017 data on first and second home down payment requirements at prefecture level was collected and matched with CHIPs data.
III. Research Findings
1. Impact of Down Payment Requirements on Housing Choice
Using binary variables to indicate whether a household purchased a home within the past two years, and minimum down payment ratios as the main explanatory variable, regression analyses (OLS, probit, and logit models) showed insufficient statistical evidence that down payment requirements can affect homebuying decisions. This may be due to the time lag in policy effects or because down payment rates below a certain threshold do not influence buying decisions, as suggested by the theoretical model.
2. Impact on Household Consumption and Investment
For households that rent or own only one home, increases in the minimum down payment ratio have a statistically significant negative impact on per capita consumption. However, in households with rental income (those owning two or more homes), the down payment ratio does not significantly affect consumption. Overall, consistent with theoretical predictions, down payment requirements negatively correlate with consumption levels.
3. Greater Impact on Service Consumption
Mortgage restrictions have a more pronounced impact on service consumption than on goods consumption. Service consumption, which includes transportation, communication, education, and entertainment, is more income elastic than goods consumption, which includes necessities like food and clothing. Consequently, when mortgage restrictions are eased, the increase in service consumption tend to be more significant. For renting households, changes in mortgage requirements do not significantly affect goods consumption but do have a significant impact on service consumption, indicating that easing mortgage restrictions can improve both the level and quality of household consumption.
4. Stronger Impact on Households with Strong Home-Buying Intentions
Households with stronger homebuying intentions are more responsive to changes in down payment requirements. Among these families, those with smaller per capita living space (used as a proxy for stronger homebuying intentions) show greater responsiveness in per capita consumption and service consumption to mortgage policy changes. This suggests that highly motivated households are more likely to adjust their consumption in response to down payment requirement changes. Notably, the found effect is not significant for goods consumption, likely due to the already low non-essential goods consumption of these households.
5. Wealth Effects on the Benefit of Relaxed Mortgage Restrictions
The study also examines the heterogeneous effect of down payment requirements on households with different wealth levels. The findings indicate that easing mortgage restrictions has a more pronounced stimulative effect on consumption in households with below-median per capita wealth, while the effect is somewhat diminished in wealthier households.
6. Heterogenous Effects on Migrant vs. Non-Migrant Households
Mortgage restrictions have a more significant impact on the consumption of migrant households compared to non-migrant households. This difference is evident mainly in goods consumption, as migrant households’ service consumption may already be minimized to essentials. This suggests that real estate policies should consider the impact on migrant populations to enhance their housing security and stimulate their consumption potential.
7. Positive Impact of Second Home Down Payment Requirements on Consumption
In most cities, different mortgage rules apply to households’ first and second (or additional) properties. While more stringent mortgage requirements for first homes reduce household consumption, higher mortgage requirements for second homes can stimulate consumption. For homeowners with extra funds for another property, higher down payments may lead some to forgo homebuying plans and redirect funds to other expenditures. However, increasing first-home mortgage requirements still negatively impacts homeowners' consumption, as many circumvent second-home restrictions by strategies such as divorcing and remarrying or registering the second property under a trusted family member's name. As a result, first-home policies continue to apply to them.
IV. Policy Recommendations
This study suggests that lowering the down payment requirement for first homes can promote household consumption, particularly in services, while raising the down payment requirement for second homes can positively impact overall consumption. The stimulative effect of easing mortgage restrictions is more pronounced in households with strong home-buying intentions, lower wealth levels, or migrant households, indicating that well-designed policies have the potential of improving the welfare of disadvantaged groups.
First, healthy development of the real estate market is crucial for expanding and improving consumption quality. Appropriate regulation can promote household consumption, while unreasonable policies may hinder consumption growth, particularly in services. Policymakers should consider the interconnectedness of different economic sectors and formulate synergistic policies.
Second, real estate regulation policies should be differentiated and targeted, taking into account the specific needs of different cities and groups to mitigate housing-induced consumption and welfare inequality. Our findings suggest that real estate policies affect both average consumption levels and the distribution of consumption, impacting welfare inequality. Tight restrictions on first homes may reduce average consumption and exacerbate inequality, while regulating speculative demand can help control household leverage, promote consumption upgrades, and improve consumption quality. Economic policy-making should consider both the policy’s overall effect and structural impacts, particularly in terms of income and wealth redistribution. Policies should be tailored to the circumstances of different households, and every city should customize real estate policies according to its unique market conditions.
Overall, the principle that "housing is for living, not for speculation" must be upheld. This approach not only addresses housing as a livelihood issue but also plays a key role in transforming macroeconomic growth drivers and promoting structural adjustments. Future efforts should focus on refining differentiated real estate policies to promote the healthy development of the real estate market, thereby driving household consumption upgrades and promoting more equitable wealth distribution.
[1] School of Public Policy and Management, Tsinghua University.
[2] School of Public Policy and Management, Tsinghua University.
[3] Academy of Macroeconomic Research.
[4] Guanghua School of Management, Peking University.
