Working Paper No. SWP 679:
By Saleem Bahaj, Angus Foulis and Gabor Pinter
The homes of those in charge of firms are an important source of finance for ongoing businesses. We use firm level accounting data, transaction level house price data and loan level residential mortgage data from the United Kingdom to show that a £1 increase in the value of the residential real estate of a firm’s directors increases the firm’s investment and wage bill by £0.03 each. These effects run through smaller firms and are similar in booms and busts. In aggregate, the homes of firm directors are worth 80% of GDP. Using this, a back of the envelope calculation suggests that a 1% increase in real estate prices leads, through this channel, to up to a 0.28% rise in business investment and a 0.08% rise in total wages paid. We complement this with evidence on how a firm responds to changes in the value of its own corporate real estate; we find that, in aggregate, the residential real estate of directors is at least as important for activity. We use an estimated general equilibrium model to quantify the importance of both types of real estate for the propagation of shocks to the macroeconomy.