Consumption Response to the Final Mortgage Payment: Evidence from Urban China

Based on China’s Urban Household Survey from the years 2010 to 2012, this paper is intended to answer quantitatively how seriously China’s aggregate consumption is suppressed by its huge mortgage burden. First, we find that consumption averagely increases up to 57.5% of the monthly payment. Given this number, an analytical calculation shows that if the total household mortgage stock in China could be reduced in the following fifteen years, aggregate consumption demand would increase by 0.9 trillion yuan per year, which is 1 percent of China’s GDP. Second, households with lower income, less liquidity or lower assets experience stronger consumption reactions before and after the last payment. Third, the magnitude of the monthly payment matters, i.e. the consumption response is attenuated and smoothed when the amount is above 7067.8 yuan per month.