Working Paper

Distributional effects of surging housing costs under Schwabe's Law

Volker Grossmann, Benjamin Larin, Hans Torben Löfflad, Thomas Steger
CESifo, Munich, 2019

CESifo Working Paper No. 7684

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.

CESifo Category
Fiscal Policy, Macroeconomics and Growth
Empirical and Theoretical Methods
Keywords: macroeconomics and housing, long-term growth, Schwabe’s Law, wealth inequality, welfare
JEL Classification: E100, E200, O400