Dark Side of housing-price appreciation

The blog title is taken from a recent VOX column and an excerpt is noted below.  Why am I emphasising this article?  Well the IMF has raised the same point about the Canadian economy and the Bank of England seems to be taking the same tack too with the UK.   But I have also raised concerns myself about the consequences of such misallocation of capital in the past (and I am not just talking debt but also more structural footprints), so the empirical evidence is interesting:


“Are housing price appreciations always desirable for the real economy? Unfortunately, the answer to this question is negative. As discussed in the theory of rational bubbles, an increase in housing market activity may crowd out commercial and industrial lending through increased interest rates. As a result, one sector of the economy that is receiving liquidity and experiencing bubbles may overheat, and crowd out other sectors of the economy.”

“In our new paper, we provide the first empirical evidence on the crowding out effect of housing price appreciation (Chakraborty et al. 2013). Looking at the period from 1988 to 2006, we find that firms that borrowed from banks located in stronger housing markets paid higher interest rates, received lower loan amounts, and ultimately invested less compared to similar firms that borrowed from banks located in weaker housing markets.”

”The normative implications for the economy are significant – if monetary policymakers are actively supporting one sector of the economy, such as the housing market, they are causing a detrimental effect for other productive sectors.”

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