Real Estate Boom and Firm Productivity: Evidence from China

Studies on the relationship between housing prices and firm behaviours have focused on the relationship between housing prices and firm financing and investment decisions. However, housing prices may affect other firm decisions. This study investigates the impact of housing prices on manufacturing firm productivity in China. To identify the causal effect, we use a national land regulation policy and city-level developable land area as exogenous sources of variation in housing prices. Using an instrumental variable approach to regression analysis and firm-level data, we find that a 10% increase in housing prices leads to a 2.1% reduction in manufacturing firms' total factor productivity (TFP). An important transmission channel is the inflow of bank credit to the real estate market caused by rising housing prices, thus crowding out loans to manufacturing firms. Due to China's distinctive dual-track land market, rising housing prices do not translate into an increase in the price of industrial land; therefore, collateral values for manufacturing firms do not increase. We further find that the negative effect of housing prices on TFP is more pronounced for firms with greater external financial dependence or greater financial constraints.