You Only Lend Twice: Corporate Borrowing and Land Values in Real Estate Cycles

Abstract

I use a natural experiment in 1980s Japan to provide evidence of the feedback loop between corporate borrowing and commercial property investment emphasized in macro-finance models with collateral constraints. Following national land use deregulations, firms located in previously land use constrained areas borrowed and invested more in real estate, reinforcing the initial positive shock to land values. I develop a multi-city spatial model with real estate collateral which uses reduced form estimates of the deregulation on firm outcomes to assess aggregate policy effects. The deregulation and corporate borrowing frictions together amplified the aggregate cycle and promoted growth in superstar cities.

Keywords: real estate collateral, amplification, investment, credit cycles, land use regulation, spatial sorting, commercial real estate prices

JEL Classification: E22, G11, G32, R31, R52