CEBA talks 2020-2021
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House Price Cycles, Wealth Inequality and Portfolio Reshuffling

Authors: Clara Martínez-Toledano

Abstract: Business cycle dynamics shape the wealth distribution through asset price changes, saving responses, or a combination of both. This paper studies the implications of housing booms and busts for wealth inequality, examining two episodes over the last four decades in Spain. I combine fiscal data with household surveys and national accounts to reconstruct the entire wealth distribution and develop a new asset-specific decomposition of wealth accumulation to disentangle the main forces behind wealth inequality dynamics (e.g., capital gains, saving rates). I find that the top 10% wealth share drops during housing booms, but the decreasing pattern reverts during busts. Differences in capital gains across wealth groups appear to be the main drivers of the decline in wealth concentration during booms. In contrast, persistent differences in saving rates across wealth groups and portfolio reshuffling towards financial assets among top wealth holders are the main explanatory forces behind the reverting evolution during housing busts. I show that the heterogeneity in saving responses is consistent with the existence of large differences in portfolio adjustment frictions across wealth groups and that tax incentives can exacerbate this differential saving behavior. These results provide novel empirical evidence to enrich macroeconomic theories of wealth inequality over the business cycle.

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