The share of housing wealth and the decline in real interest rates

Abstract The share of housing in private wealth has risen substantially across advanced economies over recent decades, alongside a near doubling of aggregate wealth‐to‐income ratios. On closer inspection, this global trend masks substantial regional disparities. While the housing wealth share changed little in the USA, it increased sharply in the larger European economies. This paper asks whether a standard asset‐pricing framework can account for these facts in light of the secular decline in interest rates. Comparing steady states calibrated to 1980 and 2017, I show that lower discount rates raise aggregate wealth only modestly, and leave the housing share essentially unchanged, because they capitalize housing and non‐housing income streams in roughly equal proportion. Matching the data requires two further mechanisms: an increase in markups, which lifts firm valuations through the present value of monopoly profits, and the presence of outright owners, which makes aggregate housing wealth more sensitive to house‐price increases by limiting offsetting quantity adjustments. Closed‐form expressions and a numerical calibration show that the interaction of these channels can reproduce both the global rise in the housing share and the USA–Europe divergence: in the USA, rising markups dominate, whereas in Europe, the expansion of outright ownership plays the central role.