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Housing Prices, Mortgage Interest Rates and the Rising Share of Capital Income in the United States

Gianni La Cava ()

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: Piketty (2014) documents how the share of aggregate income going to capital in the United States has risen in the post-war era. Rognlie (2015) has since shown that this is largely due to the housing sector. I explore the determinants of the secular rise in the share of housing capital income (or 'rental income') in the US economy. I first decompose the aggregate national accounts by geographic region and also by type of housing. I then exploit variation across US states in factors that could explain housing capital income, such as interest rates, housing prices and income growth. I show that the long-run increase in the aggregate share of housing capital income is mainly due to higher imputed rental income going to owner-occupiers. I also find evidence that the rise in the share of housing capital income over recent decades reflects a combination of: 1) lower real interest rates; 2) lower consumer price inflation; and 3) constraints on the supply of new housing in some large US cities. In effect, I argue that the fall in nominal interest rates over the 1980s and 1990s raised the demand for housing and pushed up housing prices and rents (relative to non-housing prices) in supply-constrained areas. I estimate that the long-term decline in interest rates can explain more than half the increase in the share of nominal income spent on housing since the early 1980s.

Keywords: interest rates; housing prices; housing supply; imputed rent; inequality (search for similar items in EconPapers)
JEL-codes: D33 D63 E01 E21 E43 R31 (search for similar items in EconPapers)
Date: 2016-05
New Economics Papers: this item is included in nep-his, nep-mac and nep-ure
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