Growth and crisis

Rising Property Prices – Reason for Businesses to Celebrate?

Photo by Chor Tsang on Unsplash

Photo by Chor Tsang on Unsplash

When real estate prices rise, it influences business investment. For large-scale property owners, this is something to celebrate, and investment increases. For those whose activities are smaller in scale, the outlook dims as investments decline. In their studies, Denis Fougère, Rémy Lecat, and Simon Ray are focusing on financial frictions with relation to property investments.

By Simon Ray

Simon Ray

Société Générale

Aurore Basiuk

Aurore Basiuk

AMSE, Aix-Marseille Université

In France, there has been a clear and continuous increase in real-estate prices since 1998. According to France's National Institute of Statistics and Economic Studies, the price of existing housing stock (resale property) more than doubled between 1998 and 2018. What could be causing these price increases

On the one hand, the number of households has increased significantly. This can be put down to population growth, but also the fact that households are now smaller, on average. If each household is made up of fewer people, more housing is needed and therefore demand is stronger. On the other hand, a fall in mortgage interest rates means that some of the cost of buying property is 'absorbed' (because lower interest rates lead to lower repayments), whilst at the same time the length of the mortgages is prolonged (allowing repayments to be spread over more years).1

  • 1Rubinstein M., 2013, "Variation in residential property prices in France since 1998: causes and consequences," Revue d'économie financière, 0 (3), 253-272

When it comes to households and home ownership, a price increase will put first-time buyers at a disadvantage compared to those who are already property owners. In addition, businesses feel the effects, since residential and commercial interests compete for space. It is the limited supply of space that is at the heart of any increase in property prices. Denis Fougère, Rémy Lecat, and Simon Ray highlight the effect that rising prices have on businesses, proving that it depends largely on their property holdings.

Nothing is ever black or white ... or is it?

By what method is it possible to define the effect on businesses of inflated property prices? As is the case in many sciences, there are two ways of approaching the problem: the theoretical approach, and the empirical approach.
 Denis Fougère, Rémy Lecat and Simon Ray created a theoretical model, and then tested it using empirical data. In France, there is no single database which holds details of all the real-estate assets held by companies.
Despite this, it is possible to provide a close approximation, supported by statistical analyses, using data from various sources, including a large body of data held by notaries in France.

This allows to observe two distinct effects for French businesses: Firstly, those who possess the least property suffer a negative effect. For a company, property forms part of what is termed 'production costs', and any increase in price will lower the investment capacity of the company. As such, for every 10% increase in property prices, there is a 1 per cent decrease in the investment rate for those companies who own the least property. On the other hand, for those companies owning the largest number of real-estate properties, the price increase has the opposite effect: a 10% increase in real-estate prices can bring these companies up to 6 points' increase in investments.

 The effects being measured are on the 'productive investment' of a company - that is to say any investment they might make that can allow them to increase their productivity, such as the purchasing of more efficient machines. So how can the purchase of a machine be linked to real-estate prices?

Picture of a american bank note, focus on the "Trust" part of the writing "In god we trust"

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A matter of trust

When businesses want to commit to investments, they need finance. When a company needs financing, the easiest solution is to go to the bank. However, banks must be certain that a business could repay any loan they may receive. On the other hand, companies need finance for investment and growth. The economic term 'financial frictions' refers to investments which may seem sound, but for which finance may not be offered. This could be for any number of reasons - in this case, the banks' wariness of the business client.

As a rule, banks do not trust the potential business borrower, and their capacity to borrow is thereby limited. The solution is to use something called collateral. Collateral, like the item pledged during a transaction with a pawnbroker, is an asset that can be seized in the event of non-repayment of a loan, or non-compliance with an investment contract. For businesses, this pledge may be real estate. Collateral in the form of real-estate reassures the banks and gives them confidence when lending to their business clients. Owning more real estate, therefore, allows companies to obtain financing for investment.

The study of these financial frictions is a major topic in the field of macroeconomics, a field of economics which studies financial systems as a whole. In an ideal world where wealth was distributed in an optimal manner, such frictions would not exist. Their causes and consequences are therefore particularly interesting for economists to study. The increase in the price of real estate has tended to favour those companies that own more of it. This highlights the far-from-optimal distribution of capital among French companies. But what can be done to secure fairer financing for businesses?

Picture of an empty firm, to emphasise the rising importance of homeworking

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No one knows what the future holds

Understanding the effects, using them as a basis for theorisation, and showing empirical evidence are essential steps in the process. There is no solution without a problem, and in their study, Denis Fougère, Rémy Lecat, and Simon Ray note that businesses have differentiated access to financing.
Companies who do not possess any property assets, but who may own assets without retail value, such as tools which may be specific to a particular activity, are at a disadvantage when it comes to gaining funding. This has an impact on their investments and, ultimately, on the company's growth, when some of these investments could nevertheless have enabled an increase in productivity.

There are several solutions which can be relied upon to counter these effects. Lowering property prices is difficult: the state can only influence pricing when it comes to urban planning or access to financing. In this case, it would be necessary to reduce such access, which could have disastrous social consequences and as such, other strategies need to be employed. For example, public policies can be implemented to facilitate access to financing without collateral, such as the BPI France, a Public Investment Bank created in 2012 and charged with supporting small and medium-sized businesses. Lastly, with the increasing prevalence of homeworking, the role of real-estate in the finances of companies is evolving, and if owning property assets becomes less common for businesses, financing terms are destined to change. It remains to be seen whether the evolution will be for better, or for worse.

Translated from French by

Kate Pinault


Fougère D., Lecat R., Ray S., 2019, "Real Estate Prices and Corporate Investment: Theory and Evidence of Heterogeneous Effects across Firms", Journal of Money, Credit and Banking, 51(6), 1503-1546