Distributional effects of nonresident investors on the housing market and welfare

Abstract

This paper studies the distributional effects of nonresident housing investment on residents' consumption and welfare in a dynamic stochastic general equilibrium model with two types of agents: savers and borrowers. The model is estimated with Bayesian methods applied to Taiwan. Three main results emerge. First, nonresident housing investment raises house prices and rent, validating policymakers' concerns about housing affordability. Second, higher house prices boost homeowners' property values, which strongly promotes consumption. Third, higher investment by nonresidents increases government tax revenues, the allocation of which has important welfare consequences across agents. Using tax revenues to subsidize residents through income tax reduction produces the largest welfare improvement, followed by a provision of public goods. Increasing the tax deductibility of mortgage interest is beneficial to borrowers, while allotting tax revenues to supply public capital results in the greatest welfare losses to savers.