It's election time in my country. The government boasts a decrease of 5% in consumption prices thanks to removing regulations, while the opposition blames the government for an increase of 5% in housing prices. I am wondering if there is any economic relation between the two facts. Consider the following model:
There are two nearby towns, A and B. Initially, each town has a single grocery store. In the housing market, there is a competitive equilibrium between the two towns, with $r_A$ the rent in A and $r_B$ the rent in B.
Now, the mayor of A decides to remove regulations and allow new discount stores to operate. This immediately decreases the price of consumption goods in A. People living in B hear about this and go shopping in A. Some of them, when their rent period terminates, decide to move to A in order to live near the discount stores. House owners in A notice the increased demand and decide to raise the rent. Finally, the housing market achieves a new competitive equilibrium, with the rent in A increasing to $r_A'>r_A$. In effect, the house owners have pocketed the gain from the removal of regulations.
- Is this description economically correct?
- Is there an empirical evidence showing that a decrease in consumption prices causes an increase in housing prices?
- If there is a relation, what is its magnitude? I.e, how much of the gain from decreased consumption prices is pocketed by the house owners?