58 Pages Posted: 24 Feb 2017 Last revised: 1 Jul 2017
Date Written: June 30, 2017
The major cities of the world have attracted a flurry of out-of-town (OOT) home buyers. Such capital inflows affect housing affordability, the spatial distribution of residents, construction, labor income, wealth, and ultimately welfare. We develop a spatial equilibrium model of a city that features 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. A tax on OOT home buyers, as introduced in Vancouver, mitigates the welfare loss especially when the proceeds are used to provide public goods for the locals.
Keywords: Dynamic Spatial Equilibrium, House Prices, Foreign Investors, Affordable Housing, Gentrification, Housing Taxation
JEL Classification: R10, R20, R30, R40, R51, G11, G12, H41, H70, J61
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