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Distributional effects of surging housing costs under Schwabe's Law

Author

Listed:
  • Volker Grossmann
  • Benjamin Larin
  • Hans Torben Löfflad
  • Thomas Steger

Abstract

The upward sloping trend of rents and house prices has initiated a debate on the consequences of surging housing costs for wealth inequality and welfare. We employ a frictionless two-sectoral macroeconomic model with a housing sector to investigate the dynamics of wealth inequality and the determinants of welfare. Households have non-homothetic preferences, implying that the poor choose a higher housing expenditure share, which is compatible with Schwabe’s Law. We first examine the isolated effects of increasing housing costs in partial equilibrium. The model is closed by introducing a production sector that enables us to analyze the general equilibrium consequences of a widely discussed policy option, which aims at dampening the growth of housing costs. Abolishing zoning regulations triggers a slower rent growth and reduces wealth inequality by 0.7 percentage points (measured by the top 10 percent share). Average welfare increases by 0.5 percent. The household-specific welfare effects are asymmetric. The poor benefit more than the rich, and the richest wealth decile is even worse off.

Suggested Citation

  • Volker Grossmann & Benjamin Larin & Hans Torben Löfflad & Thomas Steger, 2019. "Distributional effects of surging housing costs under Schwabe's Law," CESifo Working Paper Series 7684, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_7684
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    More about this item

    Keywords

    macroeconomics and housing; long-term growth; Schwabe’s Law; wealth inequality; welfare;

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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