The Consequences of the Housing Boom on Local Government Debt

Using a novel dataset on local government debt and house prices in California, this paper finds that the rise in house prices caused an expansion in local governments debt in the early 2000s. The elasticity between local government debt and house prices, estimated using cross-sectional variation in the share of developable land from Saiz (2010), suggest that a percentage point rise in house prices in a given county beyond the long-term trend is associated with a 0.44 percentage point rise in debt of local governments within the county.