Housing Price Fluctuations, Household Debt Risk, and Wealth Distribution: A Discussion on Housing Property Tax and Housing Subsidy Reform

Abstract

With the robust development of the real estate market, mortgage loans and housing have emerged as the primary components of Chinese household debt and wealth, respectively. Consequently, fluctuations in housing prices have become critical factors influencing household debt risk and wealth distribution. Since 2021, the real estate market has encountered considerable risks. Therefore, how can we design a reform strategy for real estate that promotes the equalization of household housing wealth while mitigating the risks associated with declining housing prices? This is a crucial challenge that must be addressed in the effort to establish a long-term, stable operational mechanism for the real estate market.

This paper employs a Dynamic Stochastic General Equilibrium (DSGE) model with heterogeneous households to explain how fluctuations in housing prices impact household debt risk and wealth distribution. It also seeks to suggest policy measures aimed at reducing household debt risks and improving wealth distribution. Research shows that low-wealth families, constrained by housing loans, can only benefit minimally from increases in housing prices, while they suffer the full brunt of wealth losses when prices fall. As a result, fluctuations in housing prices can lead to either slight gains or significant losses in the net value of properties owned by low-wealth families, which in turn heightens household debt risk and exacerbates wealth inequality. The results of policy simulations reveal that a standalone housing property tax may depress housing prices, resulting in greater wealth losses for low-wealth families and further widening the wealth gap among households. Conversely, a combination of housing property taxes and housing subsidies for low-wealth families can effectively reduce household debt risk and improve wealth distribution. Specifically, compared to a fixed housing subsidy rate, a policy model that adjusts the housing subsidy rate inversely—by focusing on housing area purchased by low-wealth families and maintaining a low frequency of adjustments—proves to be more effective in stabilizing the real estate market and reducing welfare losses.

This paper contributes to the existing literature in two significant ways. First, unlike previous research that mainly focus on the macroeconomic impacts of rising housing prices, we clarify the mechanisms behind household debt risk and housing wealth inequality under two scenarios: rising and falling housing prices. Second, current research often looks at the prevention of household debt risks and the improvement of household wealth distribution as distinct topics. In contrast, this paper proposes a holistic strategy that combines housing property taxes and housing subsidies to simultaneously reduce household debt risks and foster a fairer distribution of housing wealth among households.

This paper provides theoretical insights for a comprehensive understanding of the debt risks and wealth distribution effects related to fluctuations in housing prices. Additionally, it offers policy recommendations for establishing a long-term mechanism in the real estate market that simultaneously mitigates household debt risks and promotes an equitable distribution of housing wealth.