Amidst China’s declining consumption rate and unprecedented downward pressure on housing prices, this study aims to critically explore the asymmetric impact of housing value fluctuations on household consumption scale and structure. Specifically, it questions the traditional life-cycle-permanent-income hypothesis by investigating whether housing depreciation suppresses consumption more significantly than appreciation stimulates it. The purpose is to understand the behavioral mechanisms that are rooted in prospect theory that drive households to alter spending habits during asset shrinkage, thereby addressing the paradox of stagnant consumption despite historical real estate booms.
Based on microlevel data from five waves of the China Household Finance Survey spanning 2011–2019, covering 59,977 observations, this study uses fixed-effect regression models to analyze the asymmetric wealth effects. The approach uses prospect theory to operationalize loss aversion, separating the sample into appreciation and depreciation groups to test distinct coefficients. Furthermore, the study uses mediation models to examine transmission mechanisms, like specifically risk preference, debt burden and credit demand, and conducts extensive heterogeneity analyses across household demographics, income levels and housing characteristics.
The study reveals a significant asymmetry: housing depreciation reduces consumption far more severely than appreciation stimulates it. This suppression is driven by loss aversion, which manifests as heightened risk aversion, increased debt burdens and reduced demand for nonhousing credit. The negative impact is particularly pronounced among young/middle-aged female-headed households, low-income groups and owners of multiple or lower-quality properties. In addition, housing devaluation is found to hinder consumption upgrading, prompting a structural shift where households cut high-end spending in favor of low-cost nonessential goods.
Unlike prior literature predominantly focusing on the positive wealth effects of rising prices, this paper critically addresses the overlooked consequences of housing depreciation. By elucidating the asymmetric mechanisms through prospect theory, it contributes to a better understanding of household fragility during market downturns. The findings challenge the assumption that housing assets purely stimulate consumption and offer timely insights for policymakers to stabilize the real estate market and design targeted financial interventions for vulnerable households to sustain economic growth.
