Home equity and household portfolio choice: Evidence from China

Using unique microeconomic data on more than 20 000 households, we examine the household portfolio choice response to a housing boom in China that resulted in rapid home equity appreciation. This study isolates exogenous variation in home equity by using differences in land supply quotas and housing supply elasticities across housing markets as instruments. We find that increases in home equity wealth significantly lead to household participation in the stock market and stock shareholdings. In response to 10% of home equity appreciation, the stock market participation rate and shareholdings increase by approximately 0.6 and 0.3 percentage points, respectively. We show that the effect is more pronounced for multi-home owners and for those in the first and second tiers of cities. Moreover, portfolio choice response is weaker among households with mortgages, credit constraints, low income, and a lack of employment security. The interaction between housing and financial markets could have important implications for the macroeconomy.