Chapter 7. Origin and Development of the High
7.8 Is the Savings Rate Attributable to the High
A number of studies regard the high housing price as the reason for the high savings rate. At first glance, this notion is reasonable.
As the housing price in large cities progressively increases, people need to save money to buy a house. Many people consider that, as a house is considered a necessity for every family, residents should naturally increase their savings to pay the higher housing price when the housing price increases. In their opinion, the increasing housing price is one of the important factors of the increasing savings rate in China.27
According to statistics, the housing price in China more than doubled in 2004 and 2010, and the savings rate also increased from 46.6% in 2004 to 52.6% in 2010. Seemingly, the increasing housing price is related to the savings rate. However, if savings are divided into three parts, namely, government, enterprise, and household sav- ings, the proportions of government and enterprise savings in the total savings increased, but that of household savings dropped from 56% in 1998 to 44% in 2008. Therefore, the housing price does not synchronously increase with savings. The statistical regression shows that no significant correlation exists between household savings and housing price.
The concept of savings should at least be defined when discussing the relationship between housing price and savings. In the previous analysis, savings refer to the money that is not spent on consumption and is accumulated.
27High Savings Rate and Housing Price published by Li Yige in 21st Century Business Herald on September 10, 2009 holds that a high housing price is not a good reason for overdrawing with three generations but is a good reason for the parents to save money.
This reasoning is the important origin of the high household savings rate.”
220 From Trade Surplus to the Dispute over the Exchange Rate
Housing comprises the main proportion of people’s fixed assets.
People need to accumulate money for many years to afford the down payment and gradually repay loans in the remaining many years until they finally own a house. Before buying a house, people need to save money for a long time, but when buying a house, their deposits are spent immediately. Moreover, they must take a considerable part of their income to pay for the monthly mortgage, which can be regarded as negative savings. The positive savings offset the negative savings.
If the factors of loan interest rate, discount rate, debt, and heritage (i.e., residents are debt-free or heritage-free) are excluded, and the people’s total consumption is equal to their total income without any savings, the rising housing price will increase and decrease the savings rate before and after buying the house, respectively. In the entire society, if population growth were excluded, the positive savings of several families would increase, and the negative savings of a few families would increase. As they offset each other, housing price has no influence on the social residents’ total savings rate.
In reality, many families buy houses and then leave them for the next generation as legacy. The houses are not spent and thus can be regarded as savings. When buying houses, people first save money for the down payment and then for repaying the loans; this situa- tion can be considered as paying the house by installment. From the microscopic point of view, housing price should affect the savings.
Residents continue to save money during the entire process, and the result is the acquirement of a house. Savings are allocated in a long process. As this process usually lasts for 20 years or even longer, the influence of housing price on the savings rate is spread over a relatively long period of time. From this perspective, the increasing housing price will cause the savings rate to increase, but the strength of the impact is distributed in a long time. Therefore, the impact of the increasing housing price on the savings rate is limited in a short time.
People’s total assets increase substantially after they buy houses.
Economic theory and practice both reveal a law that states that when people have more assets, they increase their consumption; the savings rate declines as the income becomes constant. The increasing
Origin and Development of the High Savings Rate 221
housing price causes people’s houses to appreciate accordingly, thus promoting consumption and reducing savings.
In reality, many people limit their consumption to buy houses.
However, the saved money is insignificant when buying houses. In society in general, the increasing housing price cannot significantly change people’s savings behavior in the short term.28
As housing price positively and negatively affects the savings rate, the effect depends on which is stronger. Therefore, a quantitative analysis should be conducted on the influence of housing price on the savings rate. Wang and Wen (2010) of Tsinghua University estab- lished a mathematical model and proved that the rising housing price could not explain the household savings rate in China, and that the housing price has little influence on the total savings rate in the society when borrowing constraints and population growth are not considered.29If both the positive and negative effects of housing price fluctuations on the savings rate are considered, the increasing price has limited influence on the increase in savings rate.
Japan had a bubble economy in the 1980s that caused the housing price to soar. In 1988, the commercial land price in the central region of Tokyo was 350% higher than that in 1983.30 Was the increasing housing price in Japan related to the savings rate? Hayashi (1986) analyzed the relationship between the average housing price of major cities in Japan and the savings rate, and did not find any significant relation between them.31 Although housing prices in several cities increased rapidly, the savings rate was not very high. Fumio Hayashi proposes that the high household savings rate of Japan is not the main cause of the increasing housing price and that the high housing price is not the cause of the high savings rate in Japan either.
28In the TV play “Dwelling Narrowness,” Hai Ping limits her consumption and increases her savings rate to buy a house. Many people in the play do not recognize her lifestyle because she is too rash and her method is unrealistic. In fact, she can probably never afford a house by only increasing her savings rate.
29See Wang and Wen (2010). Is the high housing price a reason for China’s high house- hold savings? Available at: www.hanqing.ruc.edu.cn/admin/uploadf.
30For the analysis of the real estate bubble economy of Japan, see Xu (2006). The Housing Price and the Bubble Economy. Chapter 16, China Machine Press.
31See the article entitled “Why is Japan’s Saving Rate So Apparently High?” published by Fumio Hayashi in 1986.
222 From Trade Surplus to the Dispute over the Exchange Rate
In the long run, no significant correlation was found between hous- ing price and the savings rate. However, in the short term, the soaring housing price may lead to the increase in the savings rate.
First, if people want to buy houses but the housing price increases faster than their savings, their savings rate must increase. For exam- ple, a few years ago, houses in downtown Beijing were sold at 10,000 yuan per square meter; thus, people needed to pay 1 million yuan for a 100 square meter-house and 0.2 million yuan for down payment.
A man would have had a hard time saving 0.2 million yuan. If the housing price increased to 20,000 yuan per square meter, the man would have to pay a down payment of 0.4 million yuan for the same house that he could not afford. Thus, he would have to save more money. Undoubtedly, the money he did not spend is the savings. This kind of situation improves the household savings rate.
Second, residents’ expectations of the housing price change also affect the savings rate. In 2011, the media constantly publicized that the housing price would drop by 20%–30% in the next few months.
Many house buyers believed the estimate and rationally postponed buying houses. Why would they buy a house immediately if they could save hundreds of thousands of yuan after waiting for a few months? The real estate transaction volume decreased, and most people simply waited for subsequent events because of pleas to sup- press the housing price. As residents’ income does not decrease, an increased amount of savings in the bank may have caused the sav- ings rate to rise. The per capita housing area of China is still below the average level compared with that in other countries. Although the home ownership rate of China (80%)32 ranks first in the world, the increasing amount of idle money causes the people to have a strong desire to improve their housing conditions. Moreover, since 2000, China has approximately 16 million newborn babies,33 more than 6
32Data are taken from the Building Department. The home ownership rate is not the same as the rate of private houses. In fact, home ownership refers to the houses bought by individuals; private houses refer to rented houses and houses bought by individuals.
33The number of newborn babies was 17.71 million, 17.01 million, 16.46 million, 15.98 million, 15.92 million, 16.16 million, 15.84 million, and 20 million from 2000 to 2007, respectively.
Origin and Development of the High Savings Rate 223
million graduates, and tens of millions of migrant workers every year on average. In this case, the shrinking real estate transaction volume simply makes people postpone buying a house. As a result, the sav- ings rate increases in the short term. Thus, an increasing amount of money is accumulated. The result of blocking instead of guidance is the retaliatory rebound of the housing price.
Third, the macroeconomic regulation and control policy is bound to affect the savings rate. The housing regulation and control policy being implemented since 2010 involves limited purchasing, reduced credit, and increased mortgage threshold. The policy makers lacked confidence since the purchase limit policy was first introduced.
Almost all economists do not recognize this simple administrative intervention measure. The authorities also have to consistently claim that this measure is a last resort and that it will be terminated after a while. The limited purchasing will certainly curb the rapidly increasing housing price. Although this administrative intervention measure can reduce the price of any product, it probably entails some side effects. For example, although some rich people plan to buy a second house for renting, they cannot do so because of the purchase limit policy. The money allotted for such intention is not spent, which naturally increases the savings rate. Nevertheless, peo- ple’s income does not decrease; thus, limited purchasing prompts people to deposit a large amount of money in the bank. Urban and rural household deposits in the bank were only 11.9 trillion yuan in 2004 but soared to 35.3 trillion yuan at the end of 2011,34 which is a 300% increase in only six years.35 The purchase limit policy speeds up the household savings growth, but the means through which the pressure brought by the huge amount of money can be successfully relieved remains unclear.
Fourth, the undeveloped financial system of China has many restrictions in loaning, leading to a high savings rate. China imple- ments the scale management of credits and restricts the mortgage quota, which curbs the rapid increase in the housing price but
34Source: China Monthly Economic Indicators, 2012.1.
35Source: China Monthly Economic Indicators, 2012.1.
224 From Trade Surplus to the Dispute over the Exchange Rate
aggravates residents’ credit environment and causes the savings rate to increase to a certain extent. Moreover, increasing the threshold of the down payment extends the house buyers’ time to prepare the money. For example, in the past, approximately four years was required to prepare the down payment (20% of the house price). If the down payment standard would increase to 30% of the house price, people would then need six years to save for the amount. Extend- ing the saving time before buying a house will certainly lead to the increase in the savings rate in the short term.
The increasing housing price does not necessarily result in the rise of the savings rate, but the regulation and control policies that limit the rapid increase in housing price may push up the savings rate. Given the lack of overall consideration when temporarily curb- ing the housing price, these regulations and control policies intensify the imbalance of the financial system and conceal the danger of a financial crisis.