Heterogeneous Impact of Real Estate Prices on Firm Investment

Makoto Hazama and Iichiro Uesugi

No 30, HIT-REFINED Working Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: We study, focusing on real estate and other fixed tangible assets, how the heterogeneous effects of real estate prices influence real estate investment behavior. Theoretically, expectations of declining real estate prices not only reduce overall fixed tangible investment through a collateral channel but also reduce real estate investment through intertemporal substitution of demand. By employing a unique dataset on firms’ land transactions and overall investment in Japan during the period 1997 through 2006, we examine these predictions to find the following. First, the entire fixed tangible asset investment is positively associated with the growth rate of land prices, which evidences the collateral channel. In contrast, land investment has no statistically significant relationships with land price growth. Second, a decomposition of land investment into land purchases and sales shows that land sales actually decrease when the growth rate of prices falls. Third, large firms and firms that acquired land during and shortly after the bubble period tend to reduce land sales. This is consistent with Geltner’s (2014) argument that potential sellers of land set their reservation prices at their purchase prices and are reluctant to sell land in the face of a persistent drop in its price.

Keywords: Real estate; Land; Fixed tangible investment; Collateral channel (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2015-10
New Economics Papers: this item is included in nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Heterogeneous Impact of Real Estate Prices on Firm Investment (2015)
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