New research comes to the worrying conclusion that high and rising property prices can have damaging economic effects, by crowding out productive investment and leading to a misallocation of capital
Save time by listening to our audio articles as you multitaskIn recent years another strand of research has emerged, which, rather like the political economists of yore, attributes many long-standing economic ills to land. It explores how high and rising land prices affect lending, investment and ultimately productivity, and much of it looks closely at China’s long property boom.
Because land can easily be valued and cannot be hidden or broken, it is good collateral to borrow against. So when prices are rising, as they have in most places for much of the past few decades, the initial effect is to boost lending and economic activity. Households can use their increasingly valuable property to borrow at lower interest rates than they otherwise would. Land-owning firms, too, can access finance more easily.
Rising property prices can also discourage productive lending, and lead to capital being misallocated. When housing markets boom, banks tend to engage in more mortgage lending. But because lenders face capital constraints, this is often accompanied by reduced lending to businesses.
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