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A Cash Flow Model of Rational Housing Tenure Choice

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  • Michael S. Johnson

Abstract

This paper develops a model of housing costs in a cash flow framework. The cash flow approach allows both the consumption and investment aspects of tenure choice to be analyzed. By solving the model for the rental flow equivalent to any owning situation, we can determine whether or not a household would buy or rent from an economic perspective. The results are very sensitive to the household's income, the expected duration of occupancy, the mortgage interest rate, and inflation expectations. The results suggest that “rule‐of‐thumb” generalizations about tenure choice are often ill‐founded, and that studies of tenure choice need to explicitly consider the interaction of income, taxes, length of occupancy and expectations.

Suggested Citation

  • Michael S. Johnson, 1981. "A Cash Flow Model of Rational Housing Tenure Choice," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 9(1), pages 1-17, March.
    • Handle: RePEc:bla:reesec:v:9:y:1981:i:1:p:1-17
    DOI: 10.1111/1540-6229.00228
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    Cited by:

    1. Isaac F. Megbolugbe & Peter D. Linneman, 1993. "Home Ownership," Urban Studies, Urban Studies Journal Limited, vol. 30(4-5), pages 659-682, May.
    2. Poh Har Neo & Nai Jia Lee & Seow Eng Ong, 2003. "Government Policies and Household Mobility Behaviour in Singapore," Urban Studies, Urban Studies Journal Limited, vol. 40(13), pages 2643-2660, December.
    3. Michael J. Lea, 1982. "Housing Demand and the Standard Mortgage Instrument: Comment," Public Finance Review, , vol. 10(2), pages 185-192, April.

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