First, an aside. The Chinese government have all but declared war on the property market in the last few months as memories of the post-GFC runaway seem to be informing policy making.
Not only have they moved to restrict developers’ access to funding they’ve also issued harsh rules for how property developers may progress their capital structures (last year’s so-called ‘Three Red Lines’ policy). Moreover, they’ve also recently been asking banks to rein-in mortgage lending.
Is it surprising therefore China’s stock markets have been so conspicuously flaccid* of late as global peers have progressed to new highs?
[*Flaccid? As of last Friday the Shanghai and Shenzhen composites were nearly 40% and 24% lower than all-time highs (Oct. ’07 for both). In Hong Kong the Hang Seng China Enterprises Index (HSCEI) was 46% off it’s Oct. ’07 high and the Hang Seng Index (HSI) was c. 12% below its Jan. ’18 peak. Worth noting here the HSI and HSCEI are this much lower despite shameless jockeying by compilers to foment favorable outcome. Er?]
Which brings us on to this weeks research-in-focus.
It seem intuitive there’s a relationship between home price values and stock market participation; but how to rigorously test the notion?
Researchers from the Huazhong University of Science and Technology in Wuhan believe they’ve found a natural experiment via a change in housing policy that affected only a certain group of home owners in China from 2006 to 2008.
Over that period potential buyers of homes below 90-square meters were encouraged to buy property as deposit minimums and purchase tax levies were reduced. Almost needless to say the prices of <90-sqm properties did better than the market overall (and kept on doing better for over a decade).
So, by looking at how the owners of this class of real-estate adjusted their stock market participation some useful observations can be made.
The main conclusions were as follows:
- A 1% rise in home values increases the probability of stock market participation by 1.6%. A non-trivial multiplier.
- The effect is strongest with younger home owners and/or those with the iron-rice-bowl comfort of being employed by SOEs.
- The transmission mechanism appears to be via an alleviation of financial constraints. In other words, the less vexed buy more stocks.
The message is clear for policy makers, especially in developing markets, a healthy property market supports the development of capital markets.
Planners, for the moment at least in China, seem to have taken the view the stock market can afford a breather while home prices are held in check.
What should we expect from stock prices then as and when the policy of home price appreciation suppression is modified? Which it surely will be at some stage.
You can access the paper in full via the following link Housing Wealth and Stock Market Participation.
Happy Sunday.