Housing Price Booms and Crowding-Out Effects in Bank Lending

Analyzing the period 1988–2006, we document that banks that are active in strong housing markets increase mortgage lending and decrease commercial lending. Firms that borrow from these banks have significantly lower investment. This is especially pronounced for firms that are more capital constrained or borrow from more-constrained banks. Various extensions and robustness analyses are consistent with the interpretation that commercial loans were crowded out by banks responding to profitable opportunities in mortgage lending, rather than with a demand-based interpretation. The results suggest that housing prices appreciations have negative spillovers to the real economy, which were overlooked thus far. Received November 29, 2016; editorial decision January 12, 2018 by Editor David Hirshleifer. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web Site next to the link to the final published paper online.