In this paper, we construct a life cycle model with housing demand and
incomplete market to explore the relationship between housing demand, accompanied
with underdeveloped housing finance, and the household saving rate in China. We investigate two types of finance imperfection: a) the high
down payment ratio required by central bank, and b) the unsmooth home equity
withdrawal due to the prohibitive nature of refinancing. Without access to home equity withdrawal, households have to hold a considerable amount of
non-housing asset such as deposit, cash, and bond as it is difficult for them
to insure against negative income shocks and retirement via housing asset.
This helps to account for the rising household saving rate during the past 10
years in China where commercialized housing market had been emerging. Yet
interestingly on another note, we find higher down payment ratio leads to a
substitution between housing and non-housing assets, leaving the aggregate
household saving rate almost unchanged.