An Asset or a Cost of Living: When and How Rising House Prices Translate into Wage Setting?

Erik Neimanns

House prices have been on the rise in many of the affluent Western countries during the last decades, partly deliberately bolstered by loose credit regulation, low interest rates, and central banks’ bond and asset buying programs. The effects on economic growth, however, may be ambiguous. On the one hand, rising house prices, via a wealth effect for house owners, have the potential to strengthen domestic demand. On the other, house prices also factor in as a component of consumer prices, potentially contributing to inflation, wage claims, and a loss in international competitiveness. Examining the transmission channel from house price increases to developments in consumer prices and wages, this project formulates expectations of how measurement of inflation, characteristics of wage bargaining institutions, and the composition of union membership affect unions’ responses to rising house prices. These expectations are tested based on time-series cross-section analyses for a sample of 31 Western countries for the years 1994 to 2019. The results contribute to our understanding of the implications of recent house price developments for national growth models and distributive outcomes.