House Prices and Consumer Welfare

Patrick Bajari, C. Lanier Benkard and John Krainer

No 9783, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a new approach to measuring changes in consumer welfare due to changes in the price of owner-occupied housing. In our approach, an agent's welfare adjustment is defined as the transfer required to keep expected discounted utility constant given a change in current home prices. We demonstrate that, up to a first-order approximation, there is no aggregate change in welfare due to price increases in the existing housing stock. This follows from a simple market clearing condition where capital gains experienced by sellers are exactly offset by welfare losses to buyers. Welfare losses can occur, however, from price increases in new construction and renovations. We show that this result holds (approximately) even in a model that accounts for changes in consumption and investment plans prompted by current price changes. We estimate the welfare cost of house price appreciation to be an average of $127 per household per year over the 1984-1998 period.

JEL-codes: D6 E31 (search for similar items in EconPapers)
Date: 2003-06
New Economics Papers: this item is included in nep-ure
Note: EFG IO
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Citations: View citations in EconPapers (14)

Published as Bajari, Patrick, C. Lanier Benkard and John Krainer. "House Prices And Consumer Welfare," Journal of Urban Economics, 2005, v58(3,Nov), 474-487.

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Journal Article: House prices and consumer welfare (2005)
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