NYU Urban Seminar: PAUL ROMER: Housing Wealth

November 11, 2014

NYU Professor and Marron Institute Director Paul Romer discusses data and analysis about housing supply, prices, and national wealth based on data for France. 

In the data for France presented by Piketty and Zucman (2014), the post-WWII increase in the ratio of national wealth to national income is entirely explained by the increase in one component, housing wealth. Their interpretation is that growth in the ratio of wealth to income tells us something about the deep dynamics of growth and capitalism. It is more plausible that the increase in the relative price of this one type of capital is the result of a collision between a demand for housing that grows with income and a supply that is restricted by policy decisions. In the simplest model of housing prices, tighter restrictions on additions to the supply housing induce two effects: an increase in the rate of growth of rent per square meter of floor space relative to income and an immediate, permanent increase in the price-to-rent ratio per square meter of floor space. Policy induced increases in rent reduce welfare but do not increase inequality. In contrast, the increase in the price-to-rent ratio increases wealth inequality by shifting wealth from renters to owners. Data on the persistent change in the rent-to-price ratio for the OECD suggests that in the last two decades, many countries may have adopted these supply restrictions. It is possible that changing beliefs about expected future restrictions on supply explain the large recent increase, then collapse, of the rent-to-price ratio in most other countries.

This event is an NYU Urban Seminar hosted by the Marron Institute, NYU CUSP and the Furman Center. More information available here.