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The housing cost disease

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  • Borri, Nicola
  • Reichlin, Pietro

Abstract

Using a simple two-sector life cycle economy with housing services and bequests, we show that a rising labor efficiency in the general economy relative to the construction sector can go a long way toward explaining a significant fraction of the rising trends in wealth-to-income ratios, housing wealth, and wealth inequality, that have been documented in most advanced countries at least since the ’70s. This mechanism (which we label housing cost disease) has adverse effects on social welfare when the Planner puts sufficient weight on the less wealthy households.

Suggested Citation

  • Borri, Nicola & Reichlin, Pietro, 2018. "The housing cost disease," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 106-123.
    • Handle: RePEc:eee:dyncon:v:87:y:2018:i:c:p:106-123
    DOI: 10.1016/j.jedc.2017.12.001
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    Cited by:

    1. Grossmann, Volker & Larin, Benjamin & Löfflad, Hans Torben & Steger, Thomas, 2021. "Distributional consequences of surging housing rents," Journal of Economic Theory, Elsevier, vol. 196(C).
    2. Nicola Borri & Pietro Reichlin, 2021. "Optimal Taxation with Home Ownership and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 64-84, April.
    3. Steger, Thomas Michael & Grossmann, Volker, 2016. "Das House-Kapital: A Theory of Wealth-to-Income Ratios," VfS Annual Conference 2016 (Augsburg): Demographic Change 145936, Verein für Socialpolitik / German Economic Association.
    4. Steger, Thomas & Grossmann, Volker & Larin, Benjamin & Löfflad, Hans Torben, 2019. "Distributional Effects of Surging Housing Costs under Schwabe`s Law of Rent," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203613, Verein für Socialpolitik / German Economic Association.
    5. repec:hal:spmain:info:hdl:2441/1eob9f9aas9q18hfjsiqhggvi2 is not listed on IDEAS
    6. Volker Grossman & Thomas Steger, 2017. "Das House-Kapital: A Long Term Housing & Macro Model," IMF Working Papers 2017/080, International Monetary Fund.
    7. repec:spo:wpmain:info:hdl:2441/56k383m9o9kpb1g6f8rvv74ok is not listed on IDEAS
    8. Roberto Torrini, 2015. "Labour, Profit and Housing Rent Shares in Italian GDP: Long-Run Trends and Recent Patterns," Politica economica, Società editrice il Mulino, issue 3, pages 275-314.
    9. Gianni La Cava, 2016. "Housing prices, mortgage interest rates and the rising share of capital income in the United States," BIS Working Papers 572, Bank for International Settlements.
    10. Nicola Borri & Pietro Reichlin, 2021. "Optimal Taxation with Home Ownership and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 64-84, April.
    11. repec:hal:spmain:info:hdl:2441/3bhpicpe2q8a090eu5p3dvakb6 is not listed on IDEAS
    12. Volker Grossmann & Benjamin Larin & Hans Torben Löfflad & Thomas Steger, 2019. "Distributional effects of surging housing costs under Schwabe's Law," CESifo Working Paper Series 7684, CESifo.
    13. Reichlin, Pietro & Borri, Nicola, 2018. "Wealth Taxes and Inequality," CEPR Discussion Papers 13067, C.E.P.R. Discussion Papers.
    14. repec:spo:wpmain:info:hdl:2441/1eob9f9aas9q18hfjsiqhggvi2 is not listed on IDEAS
    15. repec:hal:spmain:info:hdl:2441/56k383m9o9kpb1g6f8rvv74ok is not listed on IDEAS
    16. Mérő, Bence & Borsos, András & Hosszú, Zsuzsanna & Oláh, Zsolt & Vágó, Nikolett, 2023. "A high-resolution, data-driven agent-based model of the housing market," Journal of Economic Dynamics and Control, Elsevier, vol. 155(C).
    17. Odran Bonnet, 2018. "Individual housing choices and aggregate housing prices: discrete choice models revisited with matching models," Sciences Po publications info:hdl:2441/3bhpicpe2q8, Sciences Po.
    18. Saha, Anuradha, 2023. "Land and housing: The twin forces of non-balanced growth," Journal of Macroeconomics, Elsevier, vol. 76(C).
    19. repec:hal:wpspec:info:hdl:2441/1eob9f9aas9q18hfjsiqhggvi2 is not listed on IDEAS
    20. Michele Battisti & Giovanni Bernardo & Andrea Mario Lavezzi & Giuseppe Maggio, 2019. "Shooting down the price: evidence from mafia homicides and housing market volatility," Working Paper series 19-05, Rimini Centre for Economic Analysis.
    21. repec:spo:wpecon:info:hdl:2441/1eob9f9aas9q18hfjsiqhggvi2 is not listed on IDEAS

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    More about this item

    Keywords

    Housing wealth; Cost disease; Overlapping generations; Wealth inequality;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • G1 - Financial Economics - - General Financial Markets

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