Distributional Effects of Surging Housing Costs Under Schwabe's Law

55 Pages Posted: 25 Jun 2019 Last revised: 18 Nov 2021

See all articles by Volker Grossmann

Volker Grossmann

University of Fribourg - Faculty of Economics and Social Science; Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute)

Benjamin Larin

University of St. Gallen

Hans Torben Löfflad

University of Leipzig

Thomas Michael Steger

University of Leipzig/Institute for Theoretical Economics/Macroeconomics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 2019

Abstract

The upward sloping trend of rents and house prices has initiated a debate on the consequences of surging housing costs for wealth inequality and welfare. We employ a frictionless two-sectoral macroeconomic model with a housing sector to investigate the dynamics of wealth inequality and the determinants of welfare. Households have non-homothetic preferences, implying that the poor choose a higher housing expenditure share, which is compatible with Schwabe’s Law. We first examine the isolated effects of increasing housing costs in partial equilibrium. The model is closed by introducing a production sector that enables us to analyze the general equilibrium consequences of a widely discussed policy option, which aims at dampening the growth of housing costs. Abolishing zoning regulations triggers a slower rent growth and reduces wealth inequality by 0.7 percentage points (measured by the top 10 percent share). Average welfare increases by 0.5 percent. The household-specific welfare effects are asymmetric. The poor benefit more than the rich, and the richest wealth decile is even worse off.

Keywords: macroeconomics and housing, long-term growth, Schwabe’s Law, wealth inequality, welfare

JEL Classification: E100, E200, O400

Suggested Citation

Grossmann, Volker and Larin, Benjamin and Löfflad, Hans Torben and Steger, Thomas Michael, Distributional Effects of Surging Housing Costs Under Schwabe's Law (2019). CESifo Working Paper No. 7684, Available at SSRN: https://ssrn.com/abstract=3409130 or http://dx.doi.org/10.2139/ssrn.3409130

Volker Grossmann (Contact Author)

University of Fribourg - Faculty of Economics and Social Science ( email )

Fribourg, CH 1700
Switzerland

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Benjamin Larin

University of St. Gallen ( email )

Bodanstrasse 8
SIAW-HSG
St.Gallen, 9000
Switzerland

Hans Torben Löfflad

University of Leipzig ( email )

Marschnerstrasse 31
D-04109 Leipzig, 04109
Germany

Thomas Michael Steger

University of Leipzig/Institute for Theoretical Economics/Macroeconomics ( email )

Grimmaische Str. 12
D-04109 Leipzig
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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