Housing Privatization as Intergenerational Redistribution

In economies with temporary fast-growing wage incomes, housing purchase subsidy to initial cohorts can serve as an effective tool of redistribution from the future towards current generations. Using China’s housing reforms in the 1990s as a policy experiment, we show quantitatively that housing purchase subsidies to cohorts who entered the labor market before 1994 substantially increased their home ownership rates in the initial years. This allowed them to reap substantial capital gains – equivalent to intergenerational transfers – when selling their houses to later generations. Quantitative welfare analysis based on a calibrated model suggests that, relative to alternative social security reforms as an intergenerational transfer scheme to the early cohorts, housing purchase subsidy during the housing privatization caused welfare losses for cohorts born in the 1980s but was more desirable for subsequent generations. Alternative social security reforms would have required high social security tax burdens for those generations that would experience a slowdown in wage growth, which is particularly detrimental to their welfare.