This paper develops an overlapping generations model that links the secular rise in inequality and mortgage credit since the 1980s to a technological shift from industrial production to IT. In the model housing has a storage and a utility generating purpose. Since mortgages are a claim on another agent’s property they enable richer agents to invest in the houses of poorer agents indirectly, and thereby store their wealth in property they do not directly own. The technological shift is centered around the idea that industrial production requires a lot of physical capital as an input factor, while IT creates value with a few high-skilled workers but without making substantial capital investments. Because borrowing is only feasible if it is backed by physical capital, IT businesses finance mainly via internal equity accumulated through retained earnings. This in turn implies that in an IT based economy the household sector cannot store a lot of value by lending to businesses. Instead housing plays a bigger role as a store of value, which is reflected in rising house prices. This process is accompanied by an expansion of mortgage credit as housing becomes unaffordable for poorer agents, forcing them to take out large mortgages.

Discussant: Egle Jakucionyte (University of Amsterdam)