The housing market and new business formation

Business starts have received much attention from policy makers with regard to their possible role as economic stimulants. From the many studies that have attempted to identify drivers of new business formation, it is clear that access to finance is critical.  In this respect the current study examines the possible role that the housing market, in particular home ownership, plays in the formation of new businesses and its potential to serve as collateral for business starter loans.  However, home ownership may have a complex influence on new start-ups as high house price inflation may divert resources away from industry and into the housing market.  Furthermore, high house price to income ratios may result in difficulties obtaining funding to start up a new business.  

The analysis will take place at the aggregate level, using a panel data set for 18 EU countries over the period 2004 to 2012, which covers both boom years and the global financial crisis, as well as the Euro crisis. The study will consider traditional factors, for example market opportunities, new technology, entrepreneurial capabilities and culture issues, alongside housing market variables to consider the determinants of the number of new births of firms.  Problems are encountered capturing a number of the conventional determinants and certain proxies are employed.

Initial findings support the view that home ownership may crowd out other investment, especially in EU nations where acquiring a home involves a large investment.  High levels of mortgage indebtedness appear to be related to low levels of new business formation.