Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/201910 
Year of Publication: 
2019
Series/Report no.: 
CESifo Working Paper No. 7684
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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.
Subjects: 
macroeconomics and housing
long-term growth
Schwabe’s Law
wealth inequality
welfare
JEL: 
E10
E20
O40
Document Type: 
Working Paper
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