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Today's column is about a subject I've become slightly obsessed with this year - the long-run negative impact of property booms on productivity, via the misallocation of capital https://www.wsj.com/articles/how-property-booms-eat-our-economic-future-11606466679
The evidence in today's piece is from a new BIS paper, and concerns the US. But I wrote about the same issue for China, where I think the misallocation is most obvious and worse, earlier this year. https://www.wsj.com/articles/the-trouble-with-a-bubble-that-just-wont-burst-11594953915
BIS paper: Listed US firms that hold real estate are persistently less productive than non-holders. Rising RE values hence relax collateral constraints for inefficient firms, allowing expansion and reducing industry-level productivity. https://www.bis.org/publ/work904.htm
IMF 2018 paper: Imperfections in the financial market and capital barriers to entry create a misallocation of managerial talent. More productive firms reallocate capital to the booming RE sector, where there are fewer financial constraints. https://www.imf.org/en/Publications/WP/Issues/2018/09/28/Sectoral-Booms-and-Misallocation-of-Managerial-Talent-Evidence-from-the-Chinese-Real-Estate-46277
University of Geneva: Real estate booms are pernicious in segmented credit markets because they can divert a substantial share of local savings into real estate development, while the tradeable sector is subject to higher capital costs and credit rationing https://voxeu.org/article/china-s-real-estate-booms-local-capital-scarcity-and-industrial-decline
Princeton/Guanghua: In response to rising land prices, banks grant more
credit to landholding firms, crowding out financing.
A 100% increase in commercial land prices leads to an estimated loss of 9% to aggregate TFP due to misallocation of capital (pdf) https://www.google.com/url?sa=t&source=web&rct=j&url=http://cicm.pbcsf.tsinghua.edu.cn/Public/Uploads/upload/CICM2019-67.pdf&ved=2ahUKEwi51eq7saLtAhUqGqYKHcx_ACsQFjADegQIBhAB&usg=AOvVaw1JVA30zqkkGAUC4DfPMOEP&cshid=1606468588955
credit to landholding firms, crowding out financing.
A 100% increase in commercial land prices leads to an estimated loss of 9% to aggregate TFP due to misallocation of capital (pdf) https://www.google.com/url?sa=t&source=web&rct=j&url=http://cicm.pbcsf.tsinghua.edu.cn/Public/Uploads/upload/CICM2019-67.pdf&ved=2ahUKEwi51eq7saLtAhUqGqYKHcx_ACsQFjADegQIBhAB&usg=AOvVaw1JVA30zqkkGAUC4DfPMOEP&cshid=1606468588955
Bottom line for me: When talking about the risk of housing booms, we're typically thinking in terms of financial crash risk. But the productivity issue may be as bad. It's so severe in China (IMO) that it could prevent it from breaking out of the middle income trap.
