A column in this week’s The Economist, How high property prices can damage the economy, confirms what I’ve been thinking for a while now, that high land and real estate prices may actually sap strength from the rest of the economy, as well as doing all the other stuff we regularly talk about (price out lower income people and families, exacerbate income inequality, slow down development, etc.)

The column examines recent research on the topic, and says:

The worrying conclusion is that high and rising property prices can also have damaging economic effects, by crowding out productive investment and leading to a misallocation of capital. In the most extreme cases, inflated land prices may already be the cause of a protracted slowdown in productivity growth.

Given Utah’s rip-roaring economy in recent years, is it possible that our outrageous housing prices will actually cause an economic slowdown, and not just because new workers can’t find affordable housing? Looks very possible.  Here’s how that would work:

…when (land) prices are rising, as they have in most places for much of the past few decades, the initial effect is to boost lending and economic activity. Households can use their increasingly valuable property to borrow at lower interest rates than they otherwise would. Land-owning firms, too, can access finance more easily.

But, rising property prices can also discourage productive lending, and lead to capital being misallocated. When housing markets boom, banks tend to engage in more mortgage lending. But because lenders face capital constraints, this is often accompanied by reduced lending to businesses. One paper, published in 2018 and looking at data from America between 1988 and 2006, found that a one-standard-deviation increase in house prices in areas where a bank has branches reduced lending growth to firms that borrow from the same bank by 42%. The total investment undertaken by the affected firms fell by 21%.

There’s actually a lot more to it than just this, as the column points out, but it’s certainly a part of things.  I think we’ve certainly had the upside to this boom here in our fair state.  Maybe the crash is coming, given this research and the rising fed interest rates in the campaign to tame inflation.

Oh, and lest you think that this all has little to do with our land use policies, the column also makes this observation:

Economists cared less about land in the 20th century. Since the turn of the millennium, however, they have increasingly debated the impact that restrictive zoning laws have on the economic output of cities.

Looks like now we planners may get some of the blame for a pending economic downturn as well!