Housing booms, reallocation and productivity

Summary

Focus

Understanding the effects of house price booms on firm behaviour and the aggregate economy is a key concern for policy makers. On the one hand, rising real estate values relax firms' financial constraints, which could lead to economic expansion and higher efficiency. However, recent studies show that house price booms can depress productivity. So far, we lack empirical evidence on the channels through which house prices affect aggregate productivity.

Contribution

The paper investigates how rising house prices affect firms' collateral values, and thereby the reallocation of capital and labour across firms and aggregate productivity. I further discuss the potential role of low interest rates in the interaction of these forces. Since interest rates are a key driver of real estate prices, a "low-for-long" interest environment could have unintended consequences for productivity. By inflating house prices low interest rates could lead to a reallocation of resources across firms.

Findings

Rising real estate prices lead to a reallocation of capital and labour towards unproductive firms and thereby depress industry productivity. I first establish that listed US firms that hold real estate are persistently less productive than non-holders. Rising real estate values hence relax collateral constraints for inefficient firms, which allows them to expand production. The ensuing reallocation of resources towards low-productivity firms has negative consequences for aggregate industry productivity: industries with a stronger relative increase in real estate values see a significant decline in total factor productivity, and the within-industry covariance between firm size and productivity declines.

Abstract

I establish that US public firms holding real estate have persistently lower levels of productivity than non-holders. Rising real estate values relax collateral constraints for companies that own real estate and allow them to expand production. Consequently, an increase in house prices reallocates capital and labor towards inefficient firms, with negative consequences for aggregate industry productivity. Industries with a stronger relative increase in real estate values see a significant decline in total factor productivity, and the within-industry covariance between firm size and productivity declines. My results suggest a novel channel through which real estate booms affect productivity and have implications for monetary policy.

JEL classification: D22, D24, O16, O47, R3.

Keywords: housing boom, collateral, misallocation, productivity, low interest rates.