Most advanced countries experienced a strong upward trend in housing costs since the mid 20th century. In Switzerland, prices of both single-family homes and owner-occupied apartments have roughly doubled in the period 1985-2016. Rental prices (for new lettings) also show a clear upward trend from 1999 onwards. One potential cause of rising housing costs is the massive immigration wave following the Agreement on the Free Movement of Persons (AFMP) between Switzerland and the EU. As of 2002, the immigration reform completely lifted immigration restrictions for EU workers, who are often better skilled and earn more than other immigrants.
The AFMP reform lends itself ideally to recover empirically causal (short-run) effects of immigration on housing prices. A recent IZA Discussion Paper by Fabienne Helfer, Volker Grossmann and Aderonke Osikominu employs two empirical strategies that exploit the reform and the historical distribution of immigrants across regions to generate exogenous variation in immigration flows to Swiss regions.
The first approach proposes an instrumental variables (IV) strategy that employs the widely used “shift-share” instrument for immigration. This instrument uses the historical distribution of immigrants (as of year 1980) across regions in Switzerland to predict current inflows into the respective regions. It exploits the tendency of newly arriving immigrants to move to areas where other immigrants of the same nationality already live.
The IV approach assumes that historical settlement patterns have no direct effect on the growth of current housing prices. Exploiting regional variation at the level of 106 local labor markets (MS regions) for the time period 1985-2016, the analysis suggests that immigration has substantially raised prices of owner-occupied housing after the AFMP reform came into place, whereas pre-reform immigration did not have an effect on housing costs. The differential impact of immigration before and after the AFMP reform confirms the exogeneity of historical immigrant settlement patterns.
The baseline estimates imply that an annual increase in the stock of foreigners equal to 1% of the initial population leads to an increase in single-family home prices by 4.3% and in owner-occupied apartment prices by 5.9% after the reform. Estimates based on cantonal data for the years 1998-2016 suggest that immigration raises rental prices even more than prices of owner-occupied housing. Immigration effects are lower when the immigration inflow is measured by the number of foreigners entering the country minus those leaving it (net migration), but still sizable.
The second empirical approach consists of an event study of the changes in house prices before and after the AFMP reform, where MS regions are grouped according to their historical share of immigrants from EU-15 countries (in 1980). Again, it is based on the hypothesis that immigration from the EU is particularly high in those regions where those migrants already live.
The event study analysis suggests that switching from a region with a historically low or medium level of immigration from EU-15 countries to one with a high past stock of EU immigrants raises the annual growth rate of house prices by about one percentage point after the AFMP reform. To the contrary, the historical level of the stock of foreigners from EU-15 countries did not matter for house prices before the reform. The event study approach thus verifies that housing price dynamics are indeed unrelated to the historical share of immigrants before the reform, which supports the validity of the shift-share instrument in the IV approach.
The results have potentially important policy implications. Despite the undisputed positive effects of (particularly) high-skilled immigration on labor market outcomes and economic development in an advanced economy such as Switzerland, the associated increases in housing prices particularly harm low-income individuals who do not own homes.
Ignoring these effects can generate resistance to liberal migration policies, as observed in Switzerland and elsewhere. Compensatory measures through the tax-transfer system and deregulation of zoning restrictions to promote housing construction could mitigate the distributional consequences of immigration in the medium run and could help avoid political backlash against the free movement of workers in Europe.