Out-of-Town Home Buyers and City Welfare

58 Pages Posted: 24 Feb 2017 Last revised: 5 Apr 2017

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance

Stijn Van Nieuwerburgh

New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: April 4, 2017

Abstract

The major cities of the world have attracted a flurry of interest from out-of-town (OOT) home buyers. Such capital inflows in local real estate have implications for affordability through their effects on prices and rents, but also for construction, local labor markets, the spatial distribution of residents, and ultimately economic welfare. We develop a spatial equilibrium model of a city that features heterogeneous households that make optimal decisions on consumption, savings, labor supply, tenure status, and location. The model generates realistic wealth accumulation and home ownership patterns over the life-cycle and in the cross-section. An inflow of OOT real estate buyers pushes up prices, rents, and wages. It increases the concentration of young, high-productivity, and wealthy households in the city center (gentrification). When OOT investors buy 10% of the housing stock, city welfare goes down by 0.3% of permanent consumption levels. The average renter suffers a large welfare loss while the average owner gains modestly. We calibrate the model to the New York metro area using data on OOT purchases.The observed increase in OOT purchases is associated with 1.1% higher house prices and a 0.1% welfare loss.

Keywords: Dynamic Spatial Equilibrium, House Prices, Foreign Investors, Affordable Housing, Gentrification

JEL Classification: R10, R20, R30, R40, R51, G11, G12, H41, H70, J61

Suggested Citation

Favilukis, Jack Y and Van Nieuwerburgh, Stijn, Out-of-Town Home Buyers and City Welfare (April 4, 2017). Available at SSRN: https://ssrn.com/abstract=2922230 or http://dx.doi.org/10.2139/ssrn.2922230

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Stijn Van Nieuwerburgh (Contact Author)

New York University Stern School of Business, Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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