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We study the link between mortgage debt and entrepreneurship using a model of occupational choice and housing tenure in a setting where loans are recourse—like in the UK and several US states. Our model shows that as long as the mortgage interest rate exceeds the risk-free rate: (i) mortgage debt diminishes the likelihood of entrepreneurship by amp...
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Context 1
... first set of results is reported in Columns (1) and (2) of Table 3. In Column (1) we present OLS associations. ...Context 2
... relevant instruments are not only correctly signed, but also strongly significant with an overall F-test statistic of 41.30. 26 Column (5) of Table 3 reports our second-stage estimates. These lend support to the predictions of our theoretical framework and confirm the findings obtained using the two alternative research strategies. ...Context 3
... Our results are displayed in Columns (1) and (2) of Table 4, where we split our dependent variable using the median of the distribution of the coefficient of variation of profits in the individual sample (at 0.131). The regression specification is the same as in the last column of Table 3, using our third research design: IV plus individual fixed effects. 31 A comparison of the two columns reveals that entrepreneurship is only adversely affected by mortgage debt in risky sectors: the coefficient on LTV is − 0.056 compared to − 0.009 for sectors with less volatile profits. ...Context 4
... (3) and (4) 29 The resulting dataset contains around 200,000 observations (rather than 350,000 as in the main sample). We replicated the regressions of columns (2), (4) and (5) of Table 3 for this subsample and obtained very similar estimates. Results are available from the authors upon request. ...Similar publications
We analyse the effect of credit supply on households' homeownership status and mortgage debt, as well as other variables relating to housing costs and home equity. We demonstrate that banking deregulation as enacted by the Interstate Banking and Branching Efficiency Act (IBBEA) together with states' autonomy to set the degree and timing of deregula...
Citations
... Secondly, this study examines three potential mechanisms that explain how housing debt affects entrepreneurship. Prior research has highlighted the risk aversion mechanism, wherein housing debt diminishes the likelihood of engaging in entrepreneurial activities by fostering risk aversion among households (Bracke et al., 2018). Except for this mechanism, we provide and examine two additional mechanisms by which housing debt intensifies capital constraints and worsens credit limitations. ...
... For example, Chen and Hu (2019) examined the relationship between entrepreneurship and homeownership across different ownership sources and proposed four mechanisms to explain the influence of homeownership: collateral effect, wealth effect, lock-in effect, and crowding-out effect. Using a large dataset consisting of individual-level information on homeowners and renters in the United States, Corradin and Popov (2015) 1 To our knowledge, Bracke et al. (2018) is the only exception that explored the association between housing debt and entrepreneurship using the British Household Panel Survey. Their empirical findings indicated that mortgage debt reduces the likelihood of starting a business by heightening household risk aversion. ...
... Additionally, research indicates that housing investment, particularly leveraged housing, tends to displace household engagement in other risky assets (Cocco, 2005). Hence, it is reasonable to hypothesise that housing debt plays a significant role in reducing the likelihood of individuals establishing and operating businesses due to heightened risk aversion among households (Bracke et al., 2018;Chen & Hu, 2019). ...
Despite extensive research on the impact of various factors on entrepreneurship, the role of housing debt remains underexplored, particularly in emerging economies. Using data from the China Household Finance Survey (CHFS), this study identifies a significant negative effect of housing debt on entrepreneurship after controlling for a comprehensive set of individual and household characteristics, as well as regional and year fixed effects. To delve deeper into the underlying mechanisms, we present direct evidence that housing debt amplifies risk aversion while imposing capital and credit constraints. Furthermore, we offer indirect evidence suggesting that housing debt exerts a stronger negative impact on employer entrepreneurship than on self-employment entrepreneurship, and a more pronounced negative effect on active entrepreneurship compared to passive entrepreneurship. Overall, this study addresses gaps in research on the impact of housing debt on entrepreneurship and provides insights into the underlying mechanisms by revealing how housing debt amplifies risk aversion, imposes capital and credit constraints, and disproportionately affects employer entrepreneurship over self-employment entrepreneurship, as well as active entrepreneurship over passive entrepreneurship.
... On the one hand, rising housing prices may promote household entrepreneurship through the wealth channel or collateral channel [9][10][11]. On the other hand, housing mortgage debt diminishes the likelihood of entrepreneurship by amplifying risk aversion [12]. ...
... Second, this paper provides empirical evidence on the speculation channel between the relationship of housing and household entrepreneurship. The existing literature mainly emphasizes the positive wealth effect or collateral effect of housing prices on household entrepreneurship [9][10][11], and the crowding-out effect of mortgage debt on household entrepreneurship [12]. In China, many studies suggest that households' preferences about housing investment or speculation play a crucial role in crowding out household entrepreneurship. ...
... The results in columns (3) and (4) of Table 6 indicate that curbing housing speculation has a significantly positive effect on homeowners without mortgages while exerting no significant effect on homeowners with outstanding mortgages. These results are consistent with the study of Bracke et al. (2018), which shows that housing mortgage debt reduces the probability of starting a business by amplifying risk aversion. ...
We document a speculation channel and complement the well-documented collateral channels by offering novel evidence about the effect of curbing housing speculation policies We estimate the positive effect of discouraging housing speculation on household entrepreneurship in China. By exploiting the city-level variations in the stringency of home purchase restrictions between 2011 and 2019 and five waves of China Household Finance Survey (CHFS) data, we find that discouraging housing speculation significantly increases the likelihood of local households starting a business. To address endogeneity concerns, we exploit plausibly exogenous variation using IV estimations and DID research design. The positive effect is stronger for local multiple-home owners, homeowners without mortgage debt, households with previous entrepreneurial experience, households of risk-loving, and households with large assets. This conclusion is robust with city-level evidence. In the mechanism discussion, we find that discouraging housing speculation significantly reduces the likelihood and the plans of local households to purchase new homes and lowers the house price expectations of local households (thus the opportunity cost of starting a business). We also provide evidence supporting the view that discouraging housing speculation increases entrepreneurial opportunities, innovative development, and local households’ social network investments, all of which contribute to starting a business. The results imply that policies to curb housing speculation can lead to beneficial spillover on entrepreneurship and the local economy, as well as contribute to the sustainability of economic growth.
... In particular, as a status good in the marriage market, increases in housing price may motivate urban youths to pursue a bigger and more expensive house/apartment and consequently undermine their entrepreneurial intentions (Wei et al., 2017). Moreover, a higher house value may increase the share of housing wealth in a household's portfolio, leading to more exposure to local housing market risk and discouraging entrepreneurship for homeowners who might want to manage/contain the overall household risk by diversifying their portfolio investments (Bracke et al., 2018;Han et al., 2020). ...
Until recently, studies of the driving forces and determinant factors of entrepreneurial entry and the emerging literature on the housing-entrepreneurship nexus have been developing independently of each other. This study attempts to connect these two strands of literature through an examination of the impact of urban housing price on the self-employment choices of urban individuals driven by different start-up motives in urban China. Drawing upon a sample of urban individuals developed from the 2016 China Labor-force dynamics data, this study finds that a high level of urban housing price exerts a significantly negative impact on urban individuals' propensity to engage in necessity-driven entrepreneurship, but exhibits no significant influence on opportunity-driven entrepreneurship. The negative consequence of high housing price is most pronounced for necessity-driven entrepreneurs who are not home owners. This study proposes the incorporation of start-up motivation in public policy support for entrepreneurship.
... Moreover, there are significant negative externalities. For example, Blanchflower and Oswald (2013) find that increases in state-level homeownership rates predict increases in unemployment in that state and Bracke et al. (2018) find that mortgage debt decreases entrepreneurship activity. There is also evidence that the tax benefits of homeownership are at least partially capitalized into house prices (Damen & Goeyvaerts, 2021;Sommer & Sullivan, 2020). ...
The federal government has long promoted homeownership through various provisions in the U.S. income tax code. The Tax Cuts and Jobs Act of 2017 (TCJA) renewed interest and debate about the treatment of housing via the tax code, particularly with respect to the mortgage interest deduction and the limitation on deductions for state and local taxes. We document the extent that the TCJA magnifies the long‐standing unequal treatment of debt and equity financing of homeownership in the tax code. Our analysis indicates that most households no longer benefit from mortgage interest and property tax deductions. We also show how the limitations on the deduction of state and local taxes alter the costs associated with homeownership across geographic areas, and we provide detailed calculations of the average and marginal tax rates at which housing related expenses are deducted. The former are relevant to the tenure choice decision, the latter to the quantity demanded decision. Finally, we document that the lost tax savings associated with the inability to benefit from mortgage interest and property tax expenditures are often small relative to the primary tax benefit owners still enjoy: the nontaxation of the return on equity invested in the home. This article is protected by copyright. All rights reserved
... The relative strength of these different channels and their combined effects on entrepreneurship tend to vary within and across political, institutional, cultural, regional and sectoral contexts (Berggren et al., 2020;Zavisca & Gerber, 2016). There exists also significant heterogeneity in the association between housing price and entrepreneurship across household homeownership status and mortgage loan portfolio (Bracke et al., 2018;Han et al., 2020;Lisi, 2017). In general, the positive effect of the collateral and wealth effect channels is more likely to be found in advanced market economies with a well-functioning financial system that allows homeowners to cash out the growth in their housing wealth for other investment purposes, while the negative and crowding-out effect is often identified in developing and transitional economies where start-up capital, risk-taking individuals, and other scarce inputs are diverted away from the entrepreneurial sector and into the speculative real estate sector. ...
This paper is aimed at exploring whether high housing prices constitute a boon or a bane for entrepreneurship in Chinese cities. Drawing upon a panel dataset for Chinese cities at the prefectural level and above for the period 2003 to 2016, this paper identifies an inverted U-shape pattern of association between housing price and urban entrepreneurship. It also finds significant inter-city housing price spillovers in first-tier urban agglomerations in which a housing price surge in first-tier cities has an inverted U-shape relationship with entrepreneurship in surrounding cities. The empirical results of this study act as a reminder to Chinese policy makers to adopt a cautious and balanced attitude towards the development of the real estate market and have important policy implications for the planning and governance of mega urban agglomerations in China.
... The predictions of their model, tested empirically using US data, suggest that an increase in property value (holding home equity constant) reduces households' propensity towards risky financial activities such as stock-holding, while increases in home equity wealth (holding property value constant) raise the exposure of households' portfolio. Following these predictions, Bracke et al. (2018) study the link between mortgage debt and entrepreneurship using UK household-level data. Their results show that mortgage debt diminishes the likelihood of entrepreneurship by amplifying risk aversion, particularly when income volatility increases. ...
We exploit a policy change in the UK Help-to-Buy (HTB) equity loan scheme in order to identify the causal link between mortgage affordability and entrepreneurship activity at the local level. We contribute to the literature on the relationship between housing finance and entrepreneurship by demonstrating the impact of government equity loans on entrepreneurship through the release of trapped liquidity. When less equity is required to buy a house, households could use the ‘additional’ liquidity to start a business. We use a spatial discontinuity in treatment methodology to take advantage of the reform of the Help-to-Buy scheme in 2016, which increased the limit of equity loans provided in London. By using data on business population at the postcode sector level, we are able to measure the impact of the new policy by comparing similar areas on the opposite sides of the Greater London Authority boundary. Our results show that an increase in mortgage affordability fosters entrepreneurial activity in affected areas by 20%, resulting in 1 more start-up on average per postcode per year. The new businesses are mainly single-plant micro enterprises in capital intensive sectors with low income volatility.
... To the extent that the construction of more mf housing indeed causes a decrease in the homeownership propensity, our study has direct relevance for the voluminous literature on the social and economic consequences of homeownership. This literature suggests that homeownership is linked to housing maintenance (Galster, 1983), investment in local public goods such as public schools (Hilber and Mayer, 2009), investment in social capital (DiPasquale and Glaeser, 1999;Hoff and Sen, 2005;Hilber, 2010), labor market outcomes and entrepreneurship (Oswald, 1996;Blanchflower and Oswald, 2013;Harding and Rosenthal, 2017;Bracke et al., 2018) or local political participation and land use regulation (e.g. Fischel, 2000Fischel, , 2001Hilber and Robert-Nicoud, 2013;Ortalo-Magné and Prat, 2014;Ahlfeldt and Maennig, 2015). ...
We explore the effects of local economic conditions on the type and size of newly constructed housing units in a city. Exploiting the 1984–2004 metro area samples of the American Housing Survey and US Census building permit data from 1980 to 2018, we find that positive local income shocks (i) increase a city’s share of multi-family housing in new construction and (ii) trigger the construction of smaller units. These responses are driven by migration. Our findings are consistent with a modified open monocentric city model that more realistically assumes land is available for conversion into new housing throughout the city.
... Lerbs (2011) kommt in einer Untersuchung für Deutschland zu dem Schluss, dass der Zusammenhang allenfalls geringfügig ist. Nach Bracke et al. (2018) führen höhere Eigennutzerquoten ferner zu einer verringerten unternehmerischen Tätigkeit, weil die Hypothekenbelastung Zugang zu Fremdkapital erschwert und es somit schwieriger wird, ein Unternehmen zu gründen. ...
Der Wunsch nach mehr Wohneigentum ist in Deutschland ungebrochen. Allerdings gelingt es nicht allen Haushalten, diesen Wunsch in die Tat umzusetzen.
... A government subsidy is a kind of unpaid transfer payment provided under certain political and economic policies for a specific period of time. Some studies have explored the impact of government subsidies on political connections , policy rights (Qi et al., 2000), company nature (Borisova et al. 2015;Borisova and Megginson 2011), policy risks (Bradley, Pantzalis, and Yuan 2016), government development goals and other factors on the development of companies (Bracke, Hilber, and Silva 2018;Jo and Senga, 2019; Smith, 2019). However, due to concealment and to the inaccessibility of data, few studies explore the impact of government subsidies on the development of companies, although some related research has focused on the impact of government subsidies on the companies' operational level, profitability, speculative asset holdings (Mansoor and Han 1994), market value (Chen and Wang 2004), financial reporting (Chen, Lee, and Li 2008;He 2016), earnings management and external financing (Houston et al. 2014). ...
Based on a sample of listed companies in the Chinese A-share market from 2007 to 2016, this paper examines the impact of government subsidies on the debt financing of companies. The empirical results show that government subsidies have a significant surplus improvement effect on the company debt financing scale, and the surplus improvement effect is more significant than the implicit guarantee effect on the company debt financing scale. Meanwhile, government subsidies have a significant implicit guarantee effect on the costs of debt financing, and the implicit guarantee effect is more significant than the surplus improvement effect on the costs of debt financing. Further studies indicate that in companies with internal financing gaps, government subsidies have a significant surplus improvement effect on the debt financing scale and a significant implicit guarantee effect on debt financing costs.
... The predictions of their model, empirically tested with an IV approach using data on the US, suggest that an increase in property value (holding home equity constant) reduces households propensity towards risky financial activities such as stockholding, while increases in home equity wealth (holding property value constant) raise the exposure of households portfolio. Following these predictions, Bracke et al. (2018) study the link between mortgage debt and entrepreneurship using UK household-level data. Their results show that mortgage debt diminishes the likelihood of entrepreneurship by amplifying risk aversion, particularly when income volatility increases. ...
... Once we identify the three different layers, we keep in our sample all postcode sectors with centroids within 2 kilometres from the boundary, precisely identifying similar and comparable sectors inside and outside of the Greater London Authority. conditions or unemployment (Hurst and Pugsley, 2011;Faggio and Silva, 2014;Bracke et al., 2018). ...
... As previously discussed, the existing literature has identified mainly two mechanisms through which mortgage lending and home equity could affect entrepreneurship: a wealth effect affecting an individuals risk aversion via a change in home-equity, or a collateral effect increasing the entrepreneurial propensity by providing collateral to get credit to start a new business. Previous studies have suggested that a growth of mortgage lending would negatively affect entrepreneurship by affecting the risk propensity of households, the wealth effect, and that these link would be stronger in sectors where profits have a higher variance and thus are more risky (Bracke et al., 2018). However, our findings suggest that the positive impact of the HTB scheme on entrepreneurship is stronger in non-risky sectors, experiencing a growth in new ventures one year after the policy reform. ...
