Does housing capital contribute to inequality? A comment on Thomas Piketty’s Capital in the 21st Century
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.
References listed on IDEAS
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- Maria Chiuri & Tullio Jappelli, 2010.
"Do the elderly reduce housing equity? An international comparison,"
Journal of Population Economics,
Springer;European Society for Population Economics, vol. 23(2), pages 643-663, March.
- Maria Concetta Chiuri & Tullio Jappelli, 2006. "Do the elderly reduce housing equity? An international comparison," CSEF Working Papers 158, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- Chiuri, Maria Concetta & Jappelli, Tullio, 2008. "Do the elderly reduce housing equity? An international comparison," CFS Working Paper Series 2008/20, Center for Financial Studies (CFS).
- Maria Chiuri & Tullio Jappelli, 2006. "Do the Elderly Reduce Housing Equity? An International Comparison," LIS Working papers 436, LIS Cross-National Data Center in Luxembourg.
- Buiter, Willem H., 2010. "Housing wealth isn't wealth," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 4, pages 1-29.
- Buiter, Willem H., 2008. "Housing Wealth isn't Wealth," CEPR Discussion Papers 6920, C.E.P.R. Discussion Papers.
- Buiter, Willem H., 2009. "Housing wealth isn't wealth," Economics Discussion Papers 2009-56, Kiel Institute for the World Economy (IfW).
- Willem H. Buiter, 2008. "Housing Wealth Isn't Wealth," NBER Working Papers 14204, National Bureau of Economic Research, Inc.
- David A. Wise, 1990. "Issues in the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise90-1, Enero-Jun.
- 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, vol. 2011(1), pages 1-37.
- Paul Gomme & Peter Rupert, 2004. "Measuring labor’s share of income," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Nov. Full references (including those not matched with items on IDEAS)
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