When Housing Prices Rise, Firms Struggle: Evidence from China
GSEM Professor Harald Hau, and Difei Ouyang, a 2021 Ph.D. graduate in Economics from the GSEM, co-authored a study analyzing the impact of local real estate booms on small manufacturing firms in China.
Published in the Journal of Urban Economics, the research explores how rising real estate prices鈥攄riven by restrictive land supply policies鈥攔educe bank credit availability for industrial firms. Using data from over 200 Chinese cities, the authors find that when credit is diverted to real estate investments, small manufacturers suffer from higher borrowing costs, lower investment, weaker productivity growth, and higher exit rates.
The findings highlight how segmented credit markets and local capital scarcity can undermine industrial competitiveness, especially for small, bank-dependent firms. The study underscores the importance of integrated credit markets and more efficient capital allocation to support long-term economic growth.
ABSTRACT
In geographically segmented credit markets, local real estate booms can deteriorate the funding conditions for small manufacturing firms and undermine their growth and competitiveness. Based on exogenous variations in the administrative land supply for residential housing across Chinese cities, we show that real estate price hikes caused by a restrictive land supply reduce bank credit to manufacturing firms, raise their borrowing costs, diminish their investment rate, compromise their output and productivity growth, and increase their exit rates. Such harmful effects are more pronounced among small firms and those located in more bank-dependent regions.
The study is available here:
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May 16, 20252025
