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Another Look at Tenure Choice, Inflation, and Taxes

  • James R. Follain
  • David C. Ling

The purpose of this paper is to explore the impact of inflation on the demand for housing. The first part of the paper presents a theoretical model that identifies the effects of inflation on the after-tax cost of housing and the choice between rental and owner-occupied housing. The second part discusses the results of a simulation model that measures the effect of inflation on the aggregate demand for housing, the aggregate homeownership rate, and the price of housing. The paper concludes that while inflation can be expected to increase the aggregate demand for housing and the price of housing relative to the general price level, inflation should ultimately lead to lower rates of homeownership. A corollary that is probably more relevant today is that lower inflation rates should reduce the real value of the housing stock and increase the homeownership rate. The paper also contains forecasts of the impact of the Tax Reform Act (TRA) of 1986 upon housing demand and the probability of homeownership for a variety of households. Copyright American Real Estate and Urban Economics Association.

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Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 16 (1988)
Issue (Month): 3 ()
Pages: 207-229

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Handle: RePEc:bla:reesec:v:16:y:1988:i:3:p:207-229
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