Distributional consequences of surging housing rents

Volker Grossmann, Benjamin Larin, Hans Torben Löfflad and Thomas Steger

Journal of Economic Theory, 2021, vol. 196, issue C

Abstract: The trajectories of real housing rents and real house prices have shown an upward sloping trend in most industrialized countries since WW2. The burden of rising housing rents is likely to be distributed unequally because income-poor households devote a larger share of their consumption expenditures on housing than income-rich households. This inverse relation between income and the expenditure share of housing is labeled Schwabe's law. We analyze how the dynamics in housing rents affect household welfare, accounting for Schwabe's law and the endogeneity of housing rents in general equilibrium. We show analytically that Schwabe's law amplifies heterogeneous welfare effects that operate through housing rent changes. We then study how zoning deregulation affects household welfare in general equilibrium. Zoning deregulation triggers a temporarily slower growth in housing rents and house prices. The representative household experiences a welfare gain of 0.37 percent. This welfare effect is unequally distributed at the micro-level. The highest welfare gain amounts to 12.52 percent, while the highest welfare loss amounts to 1.63 percent. Lower housing rent growth drives most of the overall welfare gain, and Schwabe's law is responsible for most of the variation in the welfare gain across households.

Keywords: Macroeconomics and housing; Long-term growth; Schwabe's law; Wealth inequality; Welfare (search for similar items in EconPapers)
JEL-codes: E10 E20 O40 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:196:y:2021:i:c:s0022053121000922

DOI: 10.1016/j.jet.2021.105275

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