REGRESSIVE WELFARE EFFECTS OF HOUSING BUBBLES

Andrew Graczyk and Toan Phan

Macroeconomic Dynamics, 2021, vol. 25, issue 8, 2102-2127

Abstract: We analyze the welfare effects of asset bubbles in a model with income inequality and financial friction. We show that a bubble that emerges in the value of housing, a durable asset that is fundamentally useful for everyone, has regressive welfare effects. By raising the housing price, the bubble benefits high-income savers but negatively affects low-income borrowers. The key intuition is that, by creating a bubble in the market price, savers’ demand for the housing asset for investment purposes imposes a negative externality on borrowers, who only demand the housing asset for utility purposes. The model also implies a feedback loop: high-income inequality depresses the interest rates, facilitating the existence of housing bubbles, which in turn has regressive welfare effects.

Date: 2021
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Working Paper: Regressive Welfare Effects of Housing Bubbles (2018)
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