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Can housing booms elevate financing costs of financial institutions?

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  • Ma, Chao
  • Zhang, Shuoxun

Abstract

We show that house price appreciation elevates financial institutions' financing costs because it can make households invest more in houses and invest less in or require higher returns on other assets. For identification, we employ the unique feature of wealth management products (WMPs, the largest component of China's shadow-banking sector) that the issuing markets are local whereas the markets of some products' underlying assets are national. Stocks, bonds, and deposits do not possess this feature. We find that house price growth raises WMPs' expected returns offered by banks. Household-level analyses further confirm that house price growth reduces households' WMP-investment demands.

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  • Ma, Chao & Zhang, Shuoxun, 2024. "Can housing booms elevate financing costs of financial institutions?," Journal of Development Economics, Elsevier, vol. 167(C).
    • Handle: RePEc:eee:deveco:v:167:y:2024:i:c:s0304387823001864
    DOI: 10.1016/j.jdeveco.2023.103230
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    More about this item

    Keywords

    House price; Housing boom; Financing costs; Financial institution; Bank; Wealth management products; Shadow banking;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G5 - Financial Economics - - Household Finance
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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