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Capital Flows, Asset Prices, and the Real Economy: A "China Shock" in the U.S. Real Estate Market

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Abstract

We study the effects of foreign real estate capital flows on local asset prices and employment using detailed housing transactions data. We document (i) a "China shock" in the U.S. real estate market after 2007 driven by the Chinese government's house purchase restrictions and (ii) "home bias" in foreign Chinese housing purchases in the United States as they are concentrated in ZIP codes historically populated by ethnic Chinese. Exploiting the quasi-random temporal and spatial variation of real estate capital inflows from China, we find that foreign Chinese housing purchases have a positive and significant effect on local housing and labor markets. A one standard deviation increase in exposure to these purchases explains 24% and 18% of the cross-ZIP-code variation in local house prices and employment, respectively, with the employment effect transmitted through a housing net worth channel. We also show that these purchases drive out lower-income residents. Our results highlight the role of foreign real estate capital flows in both stimulating the real economy and inducing gentrification in local economies.

Suggested Citation

  • Zhimin Li & Leslie Sheng Shen & Calvin Zhang, 2020. "Capital Flows, Asset Prices, and the Real Economy: A "China Shock" in the U.S. Real Estate Market," International Finance Discussion Papers 1286, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1286
    DOI: 10.17016/IFDP.2020.1286
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    Cited by:

    1. Jung Sakong, 2021. "Effect of Ownership Composition on Property Prices and Rents: Evidence from Chinese Investment Boom in US Housing Markets," Working Paper Series WP-2021-12, Federal Reserve Bank of Chicago.
    2. Jack Favilukis & Stijn Van Nieuwerburgh, 2021. "Out‐of‐Town Home Buyers and City Welfare," Journal of Finance, American Finance Association, vol. 76(5), pages 2577-2638, October.
    3. William N Goetzmann & Christophe Spaenjers & Stijn Van Nieuwerburgh, 2021. "Real and Private-Value Assets [Gendered prices]," The Review of Financial Studies, Society for Financial Studies, vol. 34(8), pages 3497-3526.

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    More about this item

    Keywords

    Capital flows; House price; Employment; China shock;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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