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On the User Cost and Homeownership

Author

Listed:
  • Antonia Diaz

    (Universidad Carlos III)

  • Maria Jose Luengo Prado

    (Northeastern University)

Abstract

This paper studies the differences in the cost of housing services for renters and homeowners and calculates the bias that results when we value owner-occupied housing services using a rental equivalence approach. Our framework is a life-cycle model with endogenous tenure choice with households facing idiosyncratic uninsurable earnings risk and housing price risk. We model houses as illiquid assets that provide collateral for loans. To analyze the impact of preferential housing taxation on the tenure choice and the bias, we consider a tax system that mimics that of the U.S. economy. Namely, owner-occupied housing services are not taxed and mortgage interest payments are deductible. Through simulations, we show that a rental equivalence approach (relative to a user cost approach) overestimates the cost of housing services. The magnitude of the bias is very sensitive to both the income tax rate and the size of adjustment costs in the housing market. (Copyright: Elsevier)

Suggested Citation

  • Antonia Diaz & Maria Jose Luengo Prado, 2008. "On the User Cost and Homeownership," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 584-613, July.
    • Handle: RePEc:red:issued:06-99
    DOI: 10.1016/j.red.2007.12.002
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    More about this item

    Keywords

    Consumption; Durables; Down payments; Housing; User cost;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • C80 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - General
    • E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other

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