Unveiling the link between rising house prices and household debt: insights from Chinese household-level survey data

Using four waves (2014, 2016, 2018 and 2020) of the China Family Panel Studies (CFPS), this article finds that rising house prices significantly boost household debt. The positive effect remains when interactions between geographical constraints and land regulations are employed as instrumental variables (IV), and it is robust to exclusion‑restriction tests, ‘union of confidence intervals’ (UCI) and ‘local to zero’ (LTZ) tests, and heteroscedasticity‑based IV estimates (Lewbel IV). After ruling out competing explanations, namely the effect of owner‑occupancy housing demand, wealth effects and collateral effects, we propose a housing‑investment mechanism in which rising house prices, via optimistic price expectations, stimulate investment‑oriented housing demand and increase household debt. The effect is stronger for households with greater physical and human capital, and in provinces with a larger population and higher dependence on land finance. In addition, our study reveals that housing investment‑driven borrowing is associated with increased household financial vulnerability and reduced consumption. Overall, the study emphasizes the importance of curbing rigid expectations of rising house prices and rationalizing the housing demand structure in preventing household debt accumulation and systemic financial risks.