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Expensive Houses Lead to Expensive Groceries

Johannes Stroebel_article

Using detailed bar-code level price data from grocery and drug stores in 2,400 US zip codes, the researchers document a causal response of local retail prices to changes in house prices.

According to the findings of Professor Johannes Stroebel and his co-author, Joseph Vavra of Chicago Booth, if you buy a house in an expensive neighborhood, you should expect higher prices at the checkout counter, too. In their new paper, "House Prices, Local Demand and Retail Prices," the researchers demonstrate that rising house prices lead to a corresponding increase in local retail prices.

Using detailed bar-code level price data from grocery and drug stores in 2,400 US zip codes, the researchers document a causal response of local retail prices to changes in house prices. Their findings suggest that when housing prices double, retail prices will increase by 15 to 20 percent.

The researchers believe this happens because as people’s wealth increases, they become less sensitive to prices. As a result, retailers have the ability to raise their prices, and they do so. The researchers did not find evidence that the documented retail price increases were due to higher marginal costs being passed on to the consumer. Neither wholesale costs nor increases in local wages and rents accounted for the increases.

The researchers found that this effect was unique to home-owners. In zip codes with the lowest home-ownership rates, the opposite effect occurred. Rent increases made renters more price-sensitive, and as a result, retail prices declined.

This paper has implications for monetary, labor and urban economics, and suggests a new source of markup variation in business cycle models.