This paper examines the role of rising housing prices and borrowing constraints as determinants
of China’s high household saving rate, especially among young households. Using a
life-cycle model of saving behavior in the presence of borrowing constraints, we show that the
relationship between housing prices and saving exists only under certain conditions and for certain
groups of households. Specifically, when the return on financial instruments is low (which
is the case in China), the saving rate of young households may increase with housing prices.
This relationship, moreover, is non-linear and depends on the level of wealth. Employing an
empirical strategy motivated by the theoretical model, we analyze a dataset of over six thousand
Chinese urban households spanning the years 1995, 2002 and 2007. We find evidence that higher
housing prices do in fact increase the saving rates of young households. We also find evidence
for the predicted non-linearity.