We develop a new approach to measuring changes in consumer welfare due to changes in the price of owner-occupied housing. In our approach, an agent’s welfare adjustment is defined as the transfer required to keep expected discounted utility constant given a change in current house prices. We demonstrate that, up to a first-order approximation, there is no aggregate change in welfare due to price increases in the existing housing stock. This follows from a simple market clearing condition where capital gains experienced by sellers are exactly offset by welfare losses to buyers. We show that this result holds (approximately) even in a model that accounts for changes in consumption and investment plans prompted by current house price changes. There can, however, be changes in welfare due to additions to the stock of housing, or to changes in the price of renovating and upgrading the existing stock of housing. For the United States, we estimate the welfare cost of house price appreciation to be an average of $127 per household per year over the 1984–1998 period.

Working papers in this series are preliminary and are circulated to stimulate discussion and critical comment. These papers are not subject to CBO’s formal review and editing processes. The analysis and conclusions expressed in them are those of the authors and should not be interpreted as those of the Congressional Budget O ¢ ce. References in publications should be cleared with the authors. Papers in this series can be obtained at www.cbo.gov/publications/. 1 The Impact of Progressive Dividend

Abstract not found

can and should be used to better define real consumption. Bad definitions could very well be the reason for the low growth in consumption. I base this statement on the observation that since 1982 the deflators of the a priori badly defined components of consumption have been increasing much more rapidly than the better defined components. If the price of the badly defined components had increased at the same rate as other consumption components, per capita real consumption growth after 1982 would have been in line with historical experiences. Before suggesting how to better define

This paper is being prepared for a forthcoming volume of the Handbook of Public Economics, edited by Alan Auerbach and Martin Feldstein. We thank Alan Auerbach and Tom Barthold for helpful suggestions. p. 1

We develop a new approach to measuring changes in consumer welfare due to changes in the price of owner-occupied housing. In our approach, an agent’s welfare adjustment is de…ned as the transfer required to keep expected discounted utility constant given a change in current home prices. We demonstrate that, up to a …rst-order approximation, there is no aggregate change in welfare due to price increases in the existing housing stock. This follows from a simple market clearing condition where capital gains experienced by sellers are exactly o¤set by welfare losses to buyers. Welfare losses can occur, however, from price increases in new construction and renovations. We show that this result holds (approximately) even in a model that accounts for changes in consumption and investment plans prompted by current price changes. We estimate the welfare cost of house price appreciation to be an average of $127 per household per year over the 1984-1998 period.

We have benefited from the insightful comments of Kate Antonovics, Richard Carson, Jerry

Abstract not found