The Crowding-Out Effects of Real Estate Shocks – Evidence from China

39 Pages Posted: 24 Mar 2015 Last revised: 25 Mar 2015

See all articles by Ting Chen

Ting Chen

Hong Kong University of Science & Technology (HKUST)

Laura Xiaolei Liu

Guanghua School of Management, Peking University

Li-An Zhou

Peking University - Guanghua School of Management

Date Written: March 24, 2015

Abstract

We investigate the impacts of real estate price changes on firms’ investment and financing using detailed real estate transaction data in China. China witnessed the real estate prices rise for more than a decade and recent "housing purchase restriction" policies enforced in 46 cities generated negative price shocks. Using both IV and DID approaches, we document that the rising real estate price causes land-holding firms to borrow more and invest more while the policy shocks work in the opposite direction. Further decomposition of investment into land and non-land investments shows that the rising real estate prices cause firms to only increase investment in land, especially commercial land, while decrease non-land investment. We next focus on a sub-sample of non-land owners and show that these firms borrow less and invest less if they are affected more by real estate price rise and the effects are reversed due to policy shocks. The results are consistent with the existence of a crowding-out effect. First, rising real estate price fosters more investment into the real estate sectors, which crowds out non-real estate investment. Second, rising real estate price enlarges the financial constraint gaps between firms with land and firms without land, which cause resource misallocation. To understand the aggregate effect, we investigate investment efficiency changes. We show that the increased investment associated with land price rises in fact reduces investment efficiency while policy shocks improve investment efficiency. The evidence showing that net effect would be negative calls for caution in the policy debate that advocates for investment stimulation through real estate boom.

Keywords: real estate, crowd out, resource misallocation, natural experiment

Suggested Citation

Chen, Ting and Liu, Laura Xiaolei and Zhou, Li-An, The Crowding-Out Effects of Real Estate Shocks – Evidence from China (March 24, 2015). Available at SSRN: https://ssrn.com/abstract=2584302 or http://dx.doi.org/10.2139/ssrn.2584302

Ting Chen

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Laura Xiaolei Liu (Contact Author)

Guanghua School of Management, Peking University ( email )

Peking University
Beijing, Beijing 100871
China

HOME PAGE: http://www.pku.edu.lauraliu.cn/en-home.html

Li-An Zhou

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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