The Housing Cost Disease

Using a simple two-sector life cycle economy with bequests, we show that a rising labor efficiency in the general economy relative to the construction sector can go a long way toward explaining a significant fraction of the rising trends in wealth-to-income ratios, housing wealth, and wealth inequality, that have been documented in most advanced countries at least since the '70s. When consumption inequality across households is sufficiently large, this mechanism (which we label housing cost disease) has adverse effects on a measure of social welfare based on an egalitarian principle: the higher the housing's value appreciation, the lower the welfare benefit of a rising relative labor efficiency.