Out-of-Town Home Buyers and City Welfare
51 Pages Posted: 24 Feb 2017 Last revised: 8 Oct 2018
Date Written: October 2, 2018
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
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