Dark side of housing-price appreciation

Figure 1. Housing prices and real estate loans

From a vox piece by Indraneel Chakraborty, Itay Goldstein, Andrew MacKinlay:

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….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.

Figure 2. Housing prices and commercial and industrial loans

Authors’ Conclusions:

While prior research has investigated the effects of a contraction of bank balance sheets on firm activity, our paper is the first to investigate the role of banks in capital allocation when asset prices are rising in a specific sector of the economy. We find that it is incorrect to assume that an expanding balance sheet leads to positive spillover effects across all sectors of the economy. There is a crowding out effect in which banks divert resources across sectors – in the case studied in our paper, rising real-estate prices lead banks to cut commercial loans and increase real-estate loans.

If the change in relative prices is market-driven, then banks can be seen as reallocating resources across sectors to support the growing sector. However, if the price change is policy-driven, then the channelling of assets to one overheated sector of the economy at the expense of other (potentially more productive) sectors may not be the consequence policymakers have in mind.

Read the full vox piece here.


Chakraborty, Indraneel, Itay Goldstein, and Andrew MacKinlay. Vox, “Dark side of housing-price appreciation.” Last modified November 25, 2013. Accessed November 25, 2013. http://www.voxeu.org/article/dark-side-housing-price-appreciation.

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