Distributional Consequences of Surging Housing Rents

Abstract

The trajectories of real housing rents and house prices have shown an upward sloping trend in most industrialized countries since WW2. The burden of rising housing rents is likely to be distributed unequally because income-poor households devote a larger share of their consumption expenditures on housing than income-rich households. This inverse relation between income and the expenditure share of housing is labeled Schwabe’s law. We analyze how the dynamics in housing rents affect household welfare, accounting for Schwabe’s law and the endogeneity of housing rents in general equilibrium. Our model features non-homothetic preferences so that we can replicate Schwabe’s law. Because a representative household exists, we can discuss the underlying mechanisms analytically. One of our main analytical results is that Schwabe’s law considerably amplifies heterogeneous welfare effects that operate through housing rent changes. We then study how zoning deregulation affects household welfare in general equilibrium. Zoning deregulation triggers a temporarily slower growth in housing rents and house prices. The representative household experiences a welfare gain of 0.37 percent. At the micro-level, we show that this welfare effect is highly unequally distributed. The highest welfare gain amounts to 12.52 percent, while the highest welfare loss amounts to 1.63 percent. We study the different welfare channels analytically and quantify their relative strengths. Lower housing rent growth drives most of the overall welfare gain, and Schwabe’s law is responsible for most of the variation of the welfare gain across households.

Publication
R&R at the Journal of Economic Theory