The Vicious Cycle of Housing Bubbles and Technological Stagnation

Abstract

By establishing an endogenous growth model of the industrial and real estate sectors, we analyse the housing bubbles caused by the decline in industrial innovation efficiency. When the innovation efficiency is low enough, the industrial technology growth rate will fall below the critical level, resulting in the return rate of industrial investment lower than the growth rate of housing prices. Then, enterprises would use their production capital to buy houses only for the resale purpose, causing a twofold effect: first, higher house prices and higher expected return on holding houses based on adaptive expectations; second, industrial output and industrial innovation decline, exacerbating technological stagnation. Thus, there is a vicious circle of technological stagnation and housing bubble expansion. When the industrial capital could not support the high growth rate of housing prices, the housing expectations reversed, triggering bubbles burst.