Working Paper: CEPR ID: DP16648
Authors: Andrea Pozzi; Claudio Michelacci
Abstract: We propose a sufficient statistic to evaluate whether housing prices are inefficiently low for maximizing steady-state household welfare when housing has collateral value. The statistic is based on the insight that at the optimal housing price, the consumption gainsinduced by higher housing prices offset the welfare costs of a reduction in housing uses and household leisure. To apply the methodology, we use Italian data over the 1993-2006 period. As a source of exogenous variation for housing prices we rely on a share-shiftinstrument exploiting the facts that (i) owing to seminal historical and cultural episodes, foreign nationals have preferences for buying houses in different Italian provinces and (ii) shifts in a country’s foreign investment are largely exogenous to the economic performanceof specific Italian provinces. The data indicate that higher housing prices increase local consumption more than they decrease leisure and housing use by locals, suggesting that housing prices were inefficiently low.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher housing prices (R31) | local consumption (D10) |
| higher housing prices (R31) | local employment (J68) |
| foreign housing demand (R21) | higher housing prices (R31) |
| foreign housing demand (R21) | local consumption (D10) |
| foreign housing demand (R21) | local employment (J68) |