DP10756 The Housing Cost Disease

Author(s): Nicola Borri, Pietro Reichlin
Publication Date: August 2015
Keyword(s): Capital, Housing, Productivity, Wealth, Wealth Inequality
JEL(s): D9, E2, O4
Programme Areas: International Macroeconomics and Finance, Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10756

We use a simple two-sector, life-cycle economy with bequests to explain the increasing wealth to income ratio, housing wealth and wealth inequality that have been observed in several countries over the long-run as a consequence of a rising labor efficiency in manufacturing (housing cost disease). When consumption inequality across households is sufficiently large, the housing cost disease has adverse effects on a measure of social welfare based on an egalitarian principle: the higher the housing's value appreciation, the lower the welfare benefit of a rising labor efficiency in manufacturing.