European Central Bank working paper finds rising high-skilled share accounted for 10% of Germany’s 2007–2017 house price rise and increased spatial sorting

The European Central Bank published a working paper by Nina Furbach analysing how non-homothetic housing demand shapes location choices and geographic sorting of workers in Germany, and how this interacts with house prices. Using a spatial general equilibrium model with income-dependent housing expenditure shares, the paper attributes part of Germany’s 2007–2017 house price growth and widening regional house price differences to an increase in the national share of high-skilled workers that raised housing demand, particularly in skill-intensive cities (the paper notes it does not represent the ECB’s views). Empirically, the paper estimates that doubling total household expenditure is associated with a 30% fall in the housing expenditure share, consistent with lower-income households being more sensitive to housing costs. Quantifying the model across 141 labour market regions, a rise in the high-skilled share from 16% (2007) to 22% (2017) explains around 10% of the national increase in house prices and 11% of the regional dispersion in house price increases, with roughly one third of these effects driven by increased spatial skill sorting. The paper also reports welfare effects from the skill-share shock of -0.9% for low-skilled workers and -0.8% for high-skilled workers. In a social planner exercise with region- and type-specific taxes and transfers, observed skill sorting is not significantly different from optimal in 2007 but is larger than optimal in 2017; moving from the observed to the model-implied optimal allocation yields welfare gains of 0.4% (2007) and 0.5% (2017), while place-based policies aimed at lowering geographic sorting are found to have small welfare effects.