Using a unique dataset of Chinese households, we document a robust negative causal effect of past house price growth on local entrepreneurial activity. This finding stands in sharp contrast to a positive effect typically documented in developed countries. We find that strong past house price growth fosters extrapolative housing-market optimism and stimulates greater housing investment. Consistent with crowding out, housing optimism - and the ensuing surge in housing investment - redirects resources away from entrepreneurship. This belief-based channel highlights an important mechanism through which housing booms may dampen real economic activity in emerging markets.
