DP12283 Out-of-town Home Buyers and City Welfare

Author(s): Jack Favilukis, Stijn van Nieuwerburgh
Publication Date: September 2017
Keyword(s): affordable housing, Dynamic spatial equilibrium, foreign investors, Gentrification, House Prices, property taxes
JEL(s): G11, G12, H41, H70, J61, R10, R20, R30, R40, R51
Programme Areas: Public Economics, Financial Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12283

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 with substantial heterogeneity among residents. We calibrate the model to the New York and Vancouver metro areas. The observed increase in OOT purchases is associated with 1.1% (5.0%) higher house prices and a 0.1% (0.34%) welfare loss in New York (Vancouver). Taxing OOT buyers can turn welfare losses into gains when tax revenues finance a local public good.