How Property Booms Eat Our Economic Future
Growing body of research looking at U.S. and Chinese real-estate markets suggests long booms may drag on productivity of the economy
This October, U.S. housing sales hit their highest level since 2006. China’s residential real-estate investment was up 14% relative to the same month last year. Around the world, many housing markets have shrugged off a colossal economic slump, helped by low interest rates.
In the short term, such investment is a boost to economic activity in a year where headline figures have collapsed. But there are significant downsides. The fact that housing booms can be a longer-term risk to financial stability is well known, but a growing body of research suggests that even where there is no market blowup, surges in prices and investment can have a deleterious impact on productivity.
New evidence comes from the Bank for International Settlements, with a paper by economist Sebastian Doerr showing that among U.S. listed companies, those with a higher share of real-estate assets are persistently less productive than their industry peers.
That alone wouldn’t be a problem as such. Some companies are always more productive than others. But rising real-estate prices make it easier for companies that own real estate to access funding because of their growing collateral, so multiyear booms in property prices compound the problem.
Looking at data covering the U.S. from 1993 to 2008, capital was reallocated toward productivity laggards over time, worsening the overall picture for the economy. For every 10% increase in real-estate prices, an industry would record a 0.6% relative decline in total-factor productivity due to the effect of skewed capital allocation.
Much of the field of research suggesting a similar effect focuses on China, showing that the country’s particularly extreme real estate boom is already eating away at productivity and the effective working of the economy. One paper shows that Chinese borrowing costs rise for manufacturing companies in places where housing booms are particularly extreme.
These sorts of findings, which haven’t become a major topic of conversation among policy makers, could have huge implications for the way regulators and economists think about house prices and real-estate investment.
If the mainstream view shifts toward the idea that real estate booms cause capital misallocation so large that it becomes a drag on productivity, policy toward housing markets and the real-estate sector broadly could change considerably. The emerging research here is worth keeping an eye on.