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Does housing capital contribute to inequality? A comment on Thomas Piketty’s Capital in the 21st Century

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  • Odran Bonnet

    (Département d'économie (ECON))

  • Pierre-Henri Bono

    (Sciences Po LIEPP)

  • Guillaume Chapelle

    (Département d'économie (ECON))

  • Etienne Wasmer

    (Département d'économie)

Abstract

In his book, Capital in the 21st Century,Thomas Piketty highlights the risk of an explosion of wealth inequality because capital is accumulating faster than income in several countries including the US and European countries such as France. Our work challenges the conclusions of the author in three steps. First, the author’s result is based on the rise of only one of the components of capital, namely housing capital,and due to housing prices. In fact, housing prices have risen faster than rent and income in many countries.It is worth noting that “productive” capital, excluding housing, has only risen weakly relative to income over the last few decades. Over the longer run, the “productive” capital/income ratio has not increased at all. Second, rent, not housing prices, should matter for the dynamics of wealth inequality, because rent represents both the actual income of housing capital for landlords and the dwelling costs saved by “owner-occupiers” (people living in their own houses). Logically, to properly measure capital, the value of housing capital must be corrected by measuring it on actual rental price, and not housing prices. Third, when we apply this change, we find that the capital/income ratio is actually stable or only mildly higher in the countries analyzed (France, the US, the UK, and Canada) except for Germany where it rose. These conclusions are exactly opposite to those found by Thomas Piketty. However, this does not mean that housing prices do not contribute to other forms of inequality. When housing prices rise, owners of the housing capital hold a higher value that can be transformed into consumption. It is also more difficult for young adults to become homeowners. Housing incomes of owners however do not necessarily increase which casts serious doubt on Piketty’s conclusion of a potential explosive dynamics of inequality based on these trends.

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Paper provided by Sciences Po in its series Sciences Po publications with number 2014-07.

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Date of creation: Apr 2014
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Handle: RePEc:spo:wpmain:info:hdl:2441/30nstiku669glbr66l6n7mc2oq

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  1. Buiter, Willem H., 2009. "Housing wealth isn't wealth," Economics Discussion Papers 2009-56, Kiel Institute for the World Economy.
  2. Maria Chiuri & Tullio Jappelli, 2010. "Do the elderly reduce housing equity? An international comparison," Journal of Population Economics, Springer, Springer, vol. 23(2), pages 643-663, March.
  3. Paul Gomme & Peter Rupert, 2004. "Measuring labor’s share of income," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Nov.
  4. David A. Wise, 1990. "Issues in the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise90-1, October.
  5. Dan Andrews & Aida Caldera Sánchez, 2011. "The Evolution of Homeownership Rates in Selected OECD Countries: Demographic and Public Policy Influences," OECD Journal: Economic Studies, OECD Publishing, OECD Publishing, vol. 2011(1), pages 1-37.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Thomas PIketty's Housing Problem
    by Vero de Rugy in The Corner on 2014-05-07 18:17:50
  2. Housing capital and Piketty’s analysis
    by ? in VoxEU.org on 2014-06-30 01:00:00
  3. Piketty's Terrifying Dystopia
    by Eric Falkenstein in Falkenblog on 2014-07-27 17:11:00

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