How Is Financial Literacy Important in Emerging Mortgage Markets? Evidence from Urban China

This study highlights the importance and impacting channels of financial literacy on household mortgage decisions in a market with the substantial existence of informal borrowing systems. Using panel data from a Chinese household survey, we find more financially sophisticated households are of the early adopters of mortgages and are more likely to have a higher mortgage demand in terms of loan-to-value ratio. Our further tests provide economic explanations that households with higher financial literacy level could more efficiently evaluate the implicit cost of social capital, thus reducing informal borrowing. Moreover, we find financial education programs increase formal mortgage demand over informal borrowing to finance housing purchase, and the timing and format of financial training matters regarding different sources of financial literacy