Out-of-Town Home Buyers and City Welfare

79 Pages Posted: 24 Feb 2017 Last revised: 29 Jan 2021

See all articles by Jack Y Favilukis

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER

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Date Written: January 28, 2021

Abstract

Many of the world's major cities have attracted a flurry of out-of-town (OOT) home buyers. Such capital inflows affect house prices, rents, construction, labor income, wealth, and ultimately welfare. We develop an equilibrium model, calibrated to the typical U.S. metropolitan area, to quantify the welfare effects of OOT home buyers. When OOT investors buy 10% of the housing in the city center and 5% in the suburbs, welfare among residents falls by 0.61% in consumption equivalent units. House prices and rents rise substantially, resulting in welfare gains for owners and losses for renters. A construction boom pushes up city-wide wages, reducing the competitiveness of the city and aggregate employment. The model's ability to generate substantial heterogeneity in income, wealth, and tenure status among residents is crucial for accurately measuring both aggregate and distributional effects of the OOT inflow. Policies that tax OOT buyers or mandate renting out vacant property mitigate welfare losses.

Keywords: house prices, foreign investors, property taxes

JEL Classification: R10, R20, R30, R40, R51, G11, G12, H41, H70, J61

Suggested Citation

Favilukis, Jack Y and Van Nieuwerburgh, Stijn, Out-of-Town Home Buyers and City Welfare (January 28, 2021). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2922230 or http://dx.doi.org/10.2139/ssrn.2922230

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance ( email )

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Stijn Van Nieuwerburgh (Contact Author)

Columbia University Graduate School of Business ( email )

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