Piketty’s rising share of capital income and the US housing market

VoxEU.org has a new column by Gianni La Cava available on the above topic

Thomas Piketty argues that the rising share of income accruing to housing is a key feature of the changing US income distribution. La Cava's column examines the determinants of this phenomenon. The rise occurred due to an increasing share of income accruing to owner-occupiers through imputed rent, it is concentrated in states that are constrained in terms of new housing supply, and it is closely associated with the long-run decline in real interest rates and inflation.

A key observation in Thomas Piketty’s Capital in the Twenty-First Century [...] is that the share of aggregate income accruing to capital in the US has been rising steadily in recent decades [...]. The growing disparity between the income going to wage earners and capital owners has led to calls for government intervention. But for such interventions to be effective, it is important to ask who the capital owners are.

Recent research has shown that the long-run rise in the net capital income share is mainly due to the housing sector [...]. This phenomenon is not specific to the US but has been evident in almost every advanced economy. This suggests that it is not entrepreneurs and venture capitalists that are taking an increasing share of the economy, but land owners.

So are we seeing the rise of a new `landed gentry’? And, if we are, what might explain it? Several research papers [...], print articles [...] and blogs [...] have hypothesised that the long-run increase in the housing income share is due to factors such as lower interest rates, higher mortgage debt, and constraints on home building, due to either geographic constraints or land zoning restrictions. But there is comparatively scarce empirical evidence to confirm these hypotheses.

In a new paper, I examine the determinants of the rise in the US housing capital income share over recent decades (La Cava 2016). I build upon the foundations set by Piketty and Zucman (2014), but rather than focusing on trends at the national level, I dig deeper and decompose the US national accounts data by different types of housing (e.g. owner-occupied and tenant-occupied) and, even more importantly, by US state. To the best of my knowledge, my paper is the first to explore the determinants of the secular rise in the housing share of the economy by exploiting both cross-sectional and time-series variation in factors such as housing prices, interest rates and housing supply constraints.

In the US national accounts, income accruing to the housing sector is measured as ‘net housing capital income’, or simply, net rental income (i.e. gross rents less housing costs, such as depreciation and property taxes). This measure includes rental income going to both owner-occupiers (imputed rent) and landlords (market rent). The very detailed nature of the Bureau of Economic Analysis’ regional economic accounts allows for similar estimates of housing capital income to be constructed for each US state spanning several decades.

This investigation reveals three things about the rise in the US housing capital income share in recent decades. First, it has occurred due to an increasing share of income accruing to owner-occupiers through imputed rent. Second, it is concentrated in states that are constrained in terms of new housing supply. Finally, it is closely associated with the long-run decline in real interest rates and inflation..

Point 2 here is interesting in light of the housing issues in New Zealand, especially in Auckland.

Refs.:

• La Cava, G (2016), `Housing Prices, Mortgage Interest Rates and the Rising Share of Capital Income in the United States’, Reserve Bank of Australia Research Discussion Paper, No 2016-04. Also published as BIS Working Papers No 572, Bank for International Settlements.
• Piketty, T, and G Zucman (2014), “Capital is Back: Wealth-Income Ratios in Rich Countries 1700–2010”, The Quarterly Journal of Economics, 129 (3), 1255–1310.