Using the regression discontinuity design, a quasi-experiment approach, this paper establishes a causal relationship between the down payment requirement and house prices by exploiting a unique institutional background in Shanghai. In the unique setting, the required minimal down payment ratio jumps at the Inner Ring, a circular elevated highway, from 50% to 70% for a large group of buyers. With transaction level data from the largest real estate broker in Shanghai, we find that a lower required down payment ratio increases the apartment price by 138.8 thousand RMB, around 3.71% of the average transaction price.

Using quarterly data from 1998:Q1 to 2009:Q4 and monthly data from July 2005 to February 2010, this paper examines the impact of key monetary policy variables, including long- term benchmark bank loan rate, money supply growth, and mortgage credit policy indicator, on the real estate price growth dynamics in China. Empirical results consistently demonstrate that lower interest rate, faster money supply growth and loosening mortgage down payment requirement tend to accelerate the subsequent home price growth, and vice versa. These results suggest that Chinese monetary policy actions are the key driving forces behind the change of real estate price growth in China. We also show that hot money flow does not have significant impact on the change of home price growth after controlling for the money supply growth. Finally, a bullish stock market tends to accelerate subsequent home price growth.

Using quarterly data from 1998:Q1 to 2009:Q4 and monthly data from July 2005 to February 2010, this paper examines the impact of key monetary policy variables, including long-term benchmark bank loan rate, money supply growth, and mortgage credit policy indicator, on the real estate price growth dynamics in China. Empirical results consistently demonstrate that lower interest rate, faster money supply growth and loosening mortgage down payment requirement tend to accelerate the subsequent home price growth, and vice versa. These results suggest that Chinese monetary policy actions are the key driving forces behind the change of real estate price growth in China. We also show that hot money flow does not have significant impact on the change of home price growth after controlling for the money supply growth. Finally, a bullish stock market tends to accelerate subsequent home price growth.

There are many similarities between the US, the UK and the Chinese housing markets, including the movements of interest rates and house prices. Some Chinese banks, especially the Bank of China, have been exposed to the US mortgage securitization market. These have triggered a serious concern as to whether the US credit crunch and housing market crisis may be replicated in China. This paper shows that there are some significant differences between China and the West, especially the US and the UK. Compared with the US and other western industrialized economies, the booming house market in China has been supported by fast economic growth, rapid urbanization and high domestic savings. In addition, Chinese banks are less exposed to mortgage defaults than their western counterparts because house buyers are mainly urban and high income residents who are required to have high down payments. These Sino-Western economic and social differences suggest that the US credit crunch and housing market crisis may have some negative impacts on Chinese commercial banks and the overall economy but are unlikely to cause a similar financial and housing crisis in China despite the current struggling Chinese stock markets and a slowdown of house price growth.