Financial development, homeownership and inequality

Over the past decades, several countries have experienced an unprecedented development of their financial system marked by the increased participation of households in the credit market. Credit to the private sector boomed at a significant pace mainly driven by the appeal of home ownership made possible by the easing of mortgage contracts, and accompanied by a sustained increase in house prices. Concurrently, as the residential property seemed to have become more representative since spreading out to fringes of the population that in the recent past was credit constrained, inequality arose bringing wealth and property issues to the limelight of economic debates (Piketty, 2014; Milanovic, 2016). Combined, these developments suggest that a more deep participation of households in financial markets by increasing their exposure to credit booms and busts may have contributed to the widening of the gap between the poor and the rich causing wealth inequality to expand.

This paper studies the relationship between the development of the financial system and namely the increased involvement of households in this market as homeowners, and the evolution of inequality in several advanced economies from the early 1990s. Different measures of inequality and income concentration are considered, to distinguish the richer from the ultra-rich regressed against the ratio of mortgage debt and an index of house prices. To control for all possible drivers of inequality, the estimations take into account variables that try to capture the recent trends in advanced economies such as global trade, or the deindustrialization phenomenon while considering generic features of its populations such as the education level or the age dependency ratio. The empirical analysis relies on panel data models that can control for endogeneity and for countries fixed effects. The findings point to the new dynamics of the financial markets molding the process of income redistribution by the population since contributing to increasing inequality. These results are robust to different measures of financial deepening.