Out-of-Town Home Buyers and City Welfare

51 Pages Posted: 24 Feb 2017 Last revised: 8 Oct 2018

See all articles by Jack Y Favilukis

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance

Stijn Van Nieuwerburgh

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

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Date Written: October 2, 2018

Abstract

Many of the world's major cities have attracted a flurry of out-of-town (OOT) home buyers. Such capital inflows affect house prices, rents, construction, labor income, wealth, and ultimately welfare. We develop an equilibrium model, calibrated to the typical U.S. metropolitan area, to quantify the welfare effects of OOT home buyers. When OOT investors buy 10% of the city's housing, welfare among residents falls by 0.74% in consumption equivalent units. Housing becomes less affordable, with rents increasing by 19% and house prices by 10% in our baseline model. A construction boom pushes up city-wide wages, reducing the competitiveness of the city and aggregate employment. The model's ability to generate substantial heterogeneity in income, wealth, and tenure status among residents is crucial for accurately measuring welfare effects of the OOT shock. Policies like taxing OOT buyers to finance local public goods, mandating them to rent out their property, or expanding land available for development can mitigate or reverse welfare losses.

Keywords: house prices, foreign investors, property taxes

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 (October 2, 2018). 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)

Columbia University Graduate School of Business ( email )

3022 Broadway
Uris Hall 809
New York, NY New York 10027
United States

HOME PAGE: http://https://www0.gsb.columbia.edu/faculty/svannieuwerburgh/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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

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