• Chart of the Week
  • August 3, 2020

Personal property as corporate collateral

Rido81

More valuable real estate means more wealth. And thanks to second mortgages, home equity lines of credit, and other financial tricks, homeowners can tap into that wealth easier than ever.

That means that fluctuating housing prices can have a big impact on the broader economy.

One area in particular is the business world, according to a paper in the July issue in the American Economic Review.

Authors Saleem Bahaj, Angus Foulis, and Gabor Pinter found that the homes of UK company directors are as important as corporate property for collateral-driven changes in aggregate business investment.

In fact, they estimated that a 1 percent rise in real estate prices leads to a 0.28 percent increase in corporate investment. The effect was mostly driven by directors at the smallest UK businesses pledging their personal property for new loans.

Figure 4 from the authors’ paper shows the relationship between residential real estate and investment by the size of corporate assets.

 

 

Figure 4 from Bahaj, et al. (2020)

 

Total company assets are divided into buckets along the x-axis, with each bucket's share of total residential real-estate wealth labeled at the top. For instance, the smallest bucket, firms with £0 to £1 million in assets, accounted for 84 percent of real estate held by all directors.

The y-axis indicates how much investment fluctuates in response to a £1 increase in residential real estate. (The error bars are 90 percent confidence intervals.) For companies with less than £1 million in assets, this means that investment goes up by roughly 3 pence for every one-pound increase in the home values of directors.

With directors owning roughly £1.5 trillion in residential property, small changes to real estate prices can dramatically alter the financial resources of companies and, in turn, the state of the economy.