The spectacular growth of house prices in Spain between 2003 and 2007 not only strained the real estate market and accelerated private indebtedness. A study published in The Economic Journal, titled “House Prices and Misallocation: The Impact of Collateral Channel on Productivity” reveals that this dynamic also had less obvious but profoundly relevant consequences: a significant fall in aggregate productivity caused by a misallocation of capital within industrial sectors. The paper, by Sergi Basco (University of Barcelona), David López-Rodríguez and Enrique Moral-Benito (both from the Bank of Spain), shows how companies with more real estate assets obtained more credit and invested more, regardless of their real efficiency, favoured by the “collateral channel”. 

A study to explain the paradox: more investment but lower productivity 

The study starts from a seemingly contradictory phenomenon: in the real estate boom, business investment grew at a good pace, but total factor productivity (TFP) declined. From this starting point, the authors construct a theoretical model that connects two phenomena: the rise in housing prices and the ability of firms to access financing. The model predicts that firms with more real estate assets usable as collateral to obtain credit see their borrowing capacity increase when house prices rise, creating a distortion in the way resources are distributed within a sector. This hypothesis is tested by means of a rigorous empirical analysis combining bank credit data, financial accounts of manufacturing firms and real estate price information at the municipal level. 

Misallocated capital due to real estate assets 

The results of the study are clear: companies with a higher percentage of tangible assets (mainly real estate) received more bank financing and increased their investments in response to local increases in house prices. This effect was exacerbated in municipalities with limited housing supply, where price increases were more pronounced. 

This dynamic led to unequal capital accumulation among firms in the same sector, not because of productivity, but because of the different creditworthiness of real estate assets. This phenomenon translates into a growing dispersion of the capital-labour ratio within industrial sectors, which, according to the economic literature, is a measure of resource misallocation and loss of aggregate efficiency. 

An invisible but powerful mechanism 

The authors estimate, through a counterfactual exercise, that this collateral channel mechanism could explain up to 40% of the fall in total factor productivity observed in Spain in the years of the real estate boom. What is relevant is that this effect does not come from the increased weight of the construction sector, but from distortions within other sectors, such as manufacturing, which are not directly related to housing. 

This discovery opens up new lines of research on how real estate cycles can influence the economy as a whole and highlights the importance of taking into account geographical conditions and financial transmission mechanisms when designing public policies. 

In the words of Professor Basco, “one implication of this study is that increasing the supply of housing is key to preventing these housing booms from occurring. In other words, governments should promote more housing and not worry about monetary subsidies that further increase the price of housing”. 

Sergi Basco is a professor of Economics at the UB and an expert in macroeconomics, urban economics and international finance. He has published several studies on territorial imbalances and financial dynamics. 

David López-Rodríguez and Enrique Moral-Benito are economists at the Bank of Spain and leading researchers in the fields of economic growth, public finance and monetary policy. All three combine theoretical analysis with the use of high-resolution microeconomic data, presenting their results in international academic forums such as the CEPR, the Bank of Japan or the Bank of the Republic of Colombia. 

Basco, S.; López-Rodríguez, D.; Moral-Benito, E. (2023). “House Prices and Misallocation: The Impact of the Collateral Channel on Productivity”. The Economic Journal. DOI: https://doi.org/10.1093/ej/ueae075