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.
Local governments recover revenues from overdue tax bills by auctioning off super senior claims to homes at semi-annual tax lien or tax deed sales. Using detailed data on over 18,000 tax lien sales linked to owners’ overdue tax payment histories, I document tax liens sell at a much larger haircut than mortgage foreclosed homes – for less than 10% of ex ante assessed value in the vast majority of cases. Prices of homes neighboring a tax lien sale property, on average, decline within the first two years of the sale. However, in gentrifying areas, large positive pricing spillovers emerge within three years, driven by investors’ conversion of former tax lien properties into luxury housing and commercial amenities. Underrepresented minority homeowners are more likely to be displaced by tax delinquency and less likely to transact homes in areas containing recent tax sales to institutional buyers. Private capital’s entry into the municipal finance ecosystem has amplified gentrification and the within-city Black-white wealth gap.
Flip or Flop? Tobin Taxes in the Real Estate Market (slides) [Oct. 2022]
Housing affordability concerns have led policymakers worldwide to consider transfer taxes targeting speculators. We estimate optimal taxes on property flips using a heterogeneous investor model which extends the intuition for imposing financial transaction taxes, or Tobin taxes, to the housing market. Our framework incorporates investors’ housing tenure choice, search costs, and heterogeneity in investment horizon. We calibrate the model using responses to a 2011 Taiwan sales surcharge levied on investment properties flipped within two years. Linking the universe of income tax returns to transaction records, we show the tax generated a 40% drop in second home sales volume. The resulting optimal flip tax is 4%, which is close to the flat transfer tax rates imposed in global real estate markets. Consistent with empirical findings, the model predicts imposing higher sales taxes on second homes increases house price levels but entails large welfare gains for renters on the margin of homeownership.
with Shogo Sakabe
Growing spatial inequality has led policymakers to enact tax breaks to attract corporate investment and jobs to economically peripheral regions. We demonstrate the importance of multi-plant firms’ physical capital structure for the take-up and efficacy of place-based policies by studying a national bonus depreciation scheme in Japan which altered the relative cost of capital across locations, offering high-tech manufacturers immediate cost deductions from their corporate income tax bill. Combining corporate balance sheets with a registry containing investment by plant location and asset type, we find the policy generated big gains in employment and investment in building construction and in machines at pre-existing production sites, with an implied partial equilibrium fiscal cost per job created of $16,000. For eligible firms, plant-level hiring in ineligible areas outstripped that in eligible areas, suggesting reallocation of resources within firms’ internal capital and labor markets mitigates the spatial misallocation inherent in subsidizing low productivity areas.
with Shogo Sakabe
How governments should choose the frequency of payments has received little attention in the literature on the optimal design of benefits programs. We propose a simple model in which the government chooses the interval length between payments, subject to a tradeoff between costs of providing more frequent benefits and welfare gains from mitigating consumption non-smoothing. Using a high-frequency retail dataset that links consumers to their purchase history, we apply the model to the Japanese National Pension System. Our evidence suggests suboptimal intra-cycle consumption patterns, with negligible retailer price discrimination. Model calibrations support the worldwide prevalence of monthly payment systems.
with Takashi Unayama
This paper documents heterogeneous spending out of a large stimulus tax rebate by exposure to the 1980s Japanese housing market turbulence. Linking geocoded household expenditure and financial transactions data to a new set of local housing price indices in Japan, we estimate a U-shaped pattern in the marginal propensity to consume with respect to housing price growth. Recipients living in areas with the smallest housing price gains during the 1980s spent 47% of the 1994 rebate within three months of payment, compared to 24% among recipients in areas which experienced the largest housing price gains. We find limited heterogeneity in marginal propensities to consume among households in less affected areas, but MPCs are higher for younger, renter households with no debt residing in more affected areas. Our results are consistent with near-rationality rather than a liquidity constraint story. Winners who are less exposed to housing risk respond more to payments, implying policies which target losers from housing market downturns may be less effective at stimulating consumption.
Works in Progress
Spatially Targeted LTV Policies and Collateral Values [draft pending regulatory approval]
Many governments impose household leverage limits at a national level, even when credit and housing market conditions vary substantially across locations. We explore the efficacy of loan-to-value (LTV) limits targeted towards specific neighborhoods as a macroprudential policy designed to curb house price growth. We combine administrative data from Taiwan covering the universe of all mortgage loans, personal income tax returns, a public database of geocoded housing transactions, and bank branch balance sheets. Applying a series of matched difference-in-differences and border difference-in-discontinuity designs, we find that leverage limits are effective at reducing house prices compared to alternative policy instruments such as transfer taxes. In response to a statutory tightening of the maximum LTV ratio to 60% from the standard 80% for mortgages on second homes, house prices decline by 6% in policy catchment areas relative to nearby neighborhoods not subject to LTV restrictions. However, we uncover two kinds of efficiency costs associated with place-based mortgage restrictions: (i) real commuting costs driven by homeowners sorting into neighborhoods where credit is easier to obtain, and (ii) mispricing, or "noise" costs, as banks and prospective homebuyers face incentives to obtain inflated appraisals to evade the limits.
Advertising, Leverage, and Conspicuous Consumption: Evidence from the Reverse Mortgage Market