You Only Lend Twice: Corporate Borrowing and Land Values in Real - PowerPoint PPT Presentation

You Only Lend Twice: Corporate Borrowing and Land Values in Real Estate Cycles Cameron LaPoint Yale SOM AREUEA National Conference 2020 Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 1

Motivation What are the e ff ects of a shock to corporate real estate assets? Common focus: feedback/amplification of initial shock to asset prices I RE price ↑ = ⇒ new debt ↑ = ⇒ RE inv. ↑ = ⇒ RE price ↑ Existence of this loop depends on... Nature of borrowing constraints Facts Bankruptcy 1 Reinvestment in RE collateral and/or other capital 2 This paper: natural experiment before 1980s Japanese Asset Price Cycle Land use deregulation generates boom/bust dynamics in market value of RE assets, borrowing, RE investment Spatial financial accelerator: variation in land use constraints + corporate borrowing limits = ⇒ large aggregate e ff ects Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 2

Large corporate net RE purchases during booms 30000 Net land purchases (billions 2000 JPY) 20000 10000 0 − 10000 − 20000 − 30000 1980 1985 1990 1995 2000 2005 2010 Year Non − financial corporations Financial institutions Government Households Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 3

Empirical contributions To show this feedback loop, I construct a new dataset with... I 425 local price indices for commercial/industrial RE I Geocoded facility-level firm balance sheets I Matched bank-firm balance sheets Identify new shock to RE values based on land use deregulation I National reform with di ff erential exposure to local markets I Prices ↑ more in areas where land use law was previously binding I Instruments specific to commercial/industrial RE markets I Exogeneity: variation originates from historical road networks Literature Data Pricing Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 4

Heterogeneity in land price movement (1985-90) .01 .008 Estimated Density .006 Residential Commercial Industrial .004 .002 0 0 100 200 300 400 Cumulative % growth in land prices (1985 − 90) By population Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 5

Policy background: land use deregulations in 1980s Isolate exogenous changes to building constraints by stacking two national-level reforms to land use code (“Urban Renaissance”) 1 1983 recommendation to Ministry of Construction I Increased floor-to-area ratio (FAR) allowances Example 2 1987 reform of the Building Standards Law: I Increased FAR allowance for sites along wide streets I Relaxed slant plane restriction determining height limits Basic idea: height/area limits are inc. function of width of front-facing road = ⇒ small buildings on narrow roads Local govt. unable to pass land use ordinances prior to 1999 Policy details Shock details Construction Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 6

Shock to FAR limits specific to comm/ind RE 2.5 Comm/Ind. constrained Comm/Ind. unconstrained Index (base year = 1980) 2 Res. constrained Res. unconstrained 1.5 1 .5 1975 1980 1985 1990 1995 2000 2005 2010 2015 Year For 1980-90, 30 p.p. higher growth for FAR-constrained plots in commercial areas (13 p.p. larger drop in 1990-00) Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 7

Empirical strategy Problems with OLS regressions of debt/investment on RE values: I Reverse causality: investment/borrowing might push up local RE prices I Unobserved local demand shocks driving land prices and firm decisions I Measurement error in firm market RE values IV strategy: instrument for firm market RE with reform exposure Y j i , t = ↵ i + � t + � RE j i , t + ✏ j i , t i , t = ↵ i + � t + 0 · ( T Pre RE j × Post t ) + ⌘ j j i , t I T Pre (FAR limit share, road width) extracts exogenous RE supply shock using post-reform dummy as common demand shock I Baseline: assign shock and RE price index based on HQ city j Valuation Ownership Usage Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 8

Result #1: land use shock generates boom-bust in RE 1.5 Estimated effect on RE assets 1 .5 0 − .5 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 Year 95% confidence interval estimated β k Regressions Counterfactual Balance Q ratio Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 9

Result #2: reduced form effect on new debt issues .4 Estimated effect on debt issues .3 .2 .1 0 − .1 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 Year 95% confidence interval estimated γ k Constraints Cash flows Firm vs. HQ Banks Rescaling By survivorship Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 10

Result #3: feedback and investment complementarity .025 .02 Marginal propensity to invest .015 .01 .005 0 PPE RE NonRE Machines Tools Vehicles Feedback: inv. concentrated in RE collateral Zombies Complementarity: inv. in machines = ⇒ larger aggregate e ff ects Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 11

Result #4: RE inv. concentrated in new projects .015 Marginal propensity to invest .01 .005 0 − .005 RE Land CIP Buildings Important because land/construction do not depreciate Uptick in construction further evidence of a real investment response Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 12

Going from cross-sectional to aggregate effects Build a multi-city structural model to... Compute aggregate e ff ects of land use deregulation 1 Decompose static and dynamic e ff ects of shock to interpret why P ↑ 2 Spatial implications of corporate collateral constraints 3 Main building blocks I Spatial sorting: workers migrate to cities with higher disposable income I RE supply inelasticity varies across cities due to FAR limits I Agglomeration: land inputs more productive with more people in a city I Collateral: price of RE capital determines borrowing limits D j , t +1 ≤ P j , t · K R j , t +1 Evidence Exclusion Diagram Intuition Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 13

Aggregate effects of the reform (1980-90) Full CC Partial CC No CC Data ∆ P 80 � 90 19% 20% 26% 67% ∆ Y 80 � 90 197% 399% -34% 82% ∆ K R 84% 55% 44% 87% 80 � 90 ∆ K N 422% 198% 6% 98% 80 � 90 ∆ K 80 � 90 185% 55% 29% 87% ∆ D 80 � 90 2% 19% 0% 150% GE spatial sorting dampens the aggregate e ff ect on prices and debt issues – one city’s gain in population is another’s loss Large e ff ects on output due to productivity gains/losses from sorting Calibration Zipf’s law Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 14

Spatial distribution of price growth: model vs. data 1.5 Data Full CC Partial CC Estimated Density 1 .5 0 − 2 0 2 4 De − meaned price growth (1980 − 1990) Partial CC version of model generates large local booms as in data Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 15

Intuition: model yields four types of firms RE collateral constraint Non-binding Binding Land use constraint 17% 40% Non-binding 12% 31% Binding Both types of binding constraints = ⇒ feedback loop + amplification Heterogeneity in borrowing capacity important for RE price dispersion! Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 16

Conclusion New empirical evidence for closed feedback loop between RE prices, corporate borrowing, and investment Land use deregulation = ⇒ P ↑ from productivity shock to land + borrowing constraints and further RE inv. New spatial version of financial accelerator: local feedback loops important driver of aggregate fluctuations during booms I Land use constraints + corporate borrowing limits = ⇒ amplification and superstar city e ff ects New stylized facts about 1980s Japan RE cycle I Transaction volume, price growth concentrated in non-residential RE I Need variation in both supply constraints and corporate borrowing limits to explain geographic dispersion in ∆ P Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 17

Appendix Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 1

Related work Corporate collateral channel Main deck I Kashyap et al. (1990), Almeida & Campello (2007), Gan (2007), Mora (2008), Benmelech & Bergman (2009,11), Campello et al. (2010), Chaney et al. (2012), Campello & Giambona (2013), Cvijanovi´ c (2014), Lin (2015), Chen et al. (2017), Catherine et al. (2018), Bahaj et al. (2018,19), Lian & Ma (2019), Aretz et al. (2019) E ff ects of supply regulation on real estate markets I Glaeser & Gyourko (2003), Quigley & Rosenthal (2005), Gyourko et al. (2008), Glaeser (2013), Autor et al. (2014,17), Hilber & Vermeulen (2016), Brueckner et al. (2017), Herkenho ff et al. (2018), Hsieh & Moretti (2019), Favilukis et al. (2019), Gyourko et al. (2019), Lin & Wachter (2019), Brueckner & Singh (2020) Spatial dimensions of firm financing and factor allocation I Holmes (1998), Benmelech et al. (2005), Sufi (2007), Greenstone et al. (2010), Almazan et al. (2010), Giroud (2013), Giroud & Rauh (2015), Su´ arez Serrato & Zidar (2016), Benmelech et al. (2018), Bernstein et al. (2018), Giroud & Mueller (2015,17,19), Fajgelbaum et al. (2019) Cameron LaPoint (Yale SOM) You Only Lend Twice AREUEA 2020 2