Discussion paper
DP20111 Rental Markets and Wealth Inequality in the Euro Area
Wealth inequality and aggregate homeownership are negatively correlated across the Euro area. We explain this within a quantitative overlapping generations model, where households consume food and shelter and make portfolio decisions. Households purchase real estate for consumption purposes or rent it out to other households on the private rental market. A reduced form wedge - correlated with empirical measures of rent control - governs rental market efficiency. Rental market efficiency is crucial in explaining cross-country variation in aggregate homeownership. Wealth inequality, however, is mainly driven by mortgage market characteristics, most importantly an interest rate spread between deposits and mortgages.
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