Sunday , December 5 2021
Home / Bank of International Settlement / Housing booms, reallocation and productivity

Housing booms, reallocation and productivity

Summary:
BIS Working Papers  |  No 904  |  23 November 2020 by  Sebastian Doerr PDF full text (419kb)  |  24 pages 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

Topics:
International Settlement considers the following as important:

This could be interesting, too:

IMFBlog writes Addressing Inflation Pressures Amid an Enduring Pandemic

IMFBlog writes The Economics of Health and Well-Being

IMFBlog writes The G20 Common Framework for Debt Treatments Must Be Stepped Up

FRED Blog writes Measuring expected inflation with breakevens

BIS Working Papers  |  No 904  | 
23 November 2020
PDF full text
 (419kb)
 |  24 pages

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.

International Settlement
The Bank for International Settlements (BIS) is an international company limited by shares owned by central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks". The BIS carries out its work through subcommittees, the secretariats it hosts and through an annual general meeting of all member banks. It also provides banking services, but only to central banks and other international organizations. It is based in Basel, Switzerland, with representative offices in Hong Kong and Mexico City.

Leave a Reply

Your email address will not be published. Required fields are marked *