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On The User Cost and Homeownership

  • Antonia Díaz
  • Maria J. Luengo-Prado

This paper studies the determinants of housing tenure choice and the differences in the cost of housing services across households in an overlapping generations model with household-specific uninsurable earnings risk and housing prices that vary over time. We model houses as illiquid assets that provide collateral for loans. To analyze the impact of preferential housing taxation on the tenure choice, we consider a tax system that mimics that of the U.S. economy in a stylized way. We find that a mixture of idiosyncratic earnings uncertainty, house price risk, down payments and transaction costs are needed for the model to deliver life cycle patterns of homeownership and portfolio composition similar to those found in the data. Through simulations, we also show that a rental equivalence approach (relative to a user cost approach) overestimates the mean unit cost of housing by approximately 3 percent.

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Paper provided by FEDEA in its series Working Papers with number 2006-14.

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Date of creation: Jul 2006
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Handle: RePEc:fda:fdaddt:2006-14
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  18. Jonathan Skinner, 1990. "The Dynamic Efficiency Cost of Not taxing Housing," NBER Working Papers 3454, National Bureau of Economic Research, Inc.
  19. Edward C. Prescott, 1997. "On defining real consumption," Review, Federal Reserve Bank of St. Louis, issue May, pages 47-53.
  20. Gourinchas, P.O. & Parker, J.A., 1997. "Consumption Over the Life Cycle," Working papers 9722, Wisconsin Madison - Social Systems.
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  24. Linneman, Peter & Megbolugbe, Isaac F. & Wachter, Susan M. & Cho, Man, 1997. "Do Borrowing Constraints Change U.S. Homeownership Rates?," Journal of Housing Economics, Elsevier, vol. 6(4), pages 318-333, December.
  25. Martin Gervais, 1998. "Housing Taxation and Capital Accumulation," UWO Department of Economics Working Papers 9807, University of Western Ontario, Department of Economics.
  26. Antonia Díaz & Maria Jose Luengo-Prado, 2006. "The Wealth Distribution With Durable Goods," Economics Working Papers we067027, Universidad Carlos III, Departamento de Economía.
  27. Louise Sheiner & David N. Weil, 1992. "The Housing Wealth of the Aged," NBER Working Papers 4115, National Bureau of Economic Research, Inc.
  28. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
  29. Alicia H. Munnell & Mauricio Soto, 2006. "What Replacement Rates Do Households Actually Experience In Retirement?," Working Papers, Center for Retirement Research at Boston College wp2005-10, Center for Retirement Research.
  30. Hansen, G D, 1993. "The Cyclical and Secular Behaviour of the Labour Input: Comparing Efficiency Units and Hours Worked," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 71-80, Jan.-Marc.
  31. William Goetzmann & Matthew Spiegel, 2000. "The Policy Implications of Portfolio Choice in Underserved Mortgage Markets," Yale School of Management Working Papers ysm161, Yale School of Management, revised 01 Mar 2001.
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