Housing booms and local capital misallocation

How does a booming housing market crowd out credit access of firms and distort resource allocation in the real economy? This paper relies on a housing purchase restriction (HPR) policy in Chinese cities as a natural experiment and shows that an exogenous reduction in housing demand and a halt on housing price growth significantly improved local firms’ access to credit and lowered their financial costs. In addition, because the credit relaxation particularly affected firms that were ex ante more constrained, the policy significantly reduced cross-firm capital misallocation within treated cities and positively affected industrial productivity. We estimate that the HPR policy overall led to a 2% improvement in the total factor productivity (TFP) of Chinese industrial firms. We present empirical evidence to demonstrate that these real effects of a housing market decline can be rationalized by bank capital constraints and a significant crowding-out effect of households’ mortgage loans and credit to local governments, backed by local land sales revenue, on credit to firms.