Do Higher House Prices Crowd-Out or Crowd-In Manufacturing? A Spatial Econometrics Approach

This paper examines the hypothesis that higher house prices lead to greater manufacturing concentration in Chinese cities. There are several innovations in our work, such as allowing for feedback and spillover effects across cities via using spatial panel data models. We also address the endogeneity of house prices with a difference-in-differences approach that relies on house purchase restrictions imposed by some local governments that vary across cities and time, which limit the number of homes residents can purchase, and with an instrumental variables approach. Across various model specifications, we find robust evidence of significant crowding-in of manufacturing firms when house prices rise. This crowding-in impact tends to be dampened in cities with house purchase restrictions in effect. Our direct, indirect, and total effects of house price changes on manufacturing concentration imply significant feedback and spillover effects across cities when a city’s house prices change and when a city experiences a house purchase restriction. These findings have important potential policy implications for real estate markets when local policymakers want to increase their city’s manufacturing concentration. These include offering subsidies and/or other incentives for homeownership, and discouraging house purchase restriction policies by the local governments.