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Dynamic housing expenditures and household welfare

  • Laura Blow

    ()

    (Institute for Fiscal Studies)

  • Lars Nesheim

    ()

    (Institute for Fiscal Studies)

In this paper we develop a measure of current "expenditures" on housing services for owner-occupiers. Having such a measure is important for measuring the relative welfare of households, especially when comparing renters and owners and for measuring inflation. From a theoretical perspective expenditures equal the "shadow price" of housing services (the marginal rate of substitution between housing services and non-durable consumption) multiplied by the quantity of housing services consumed. In an idealised world, two simple measures of the shadow price are available; the user cost of housing capital and the rental price of an equivalent rental house. However, imperfect capital markets, risk aversion, the tax system, moving costs and systematic differences between houses available in the rental and owner occupied sectors drive a wedge between the shadow price of housing and these other two measures. This paper contributes to previous research by calibrating a lifecycle model of housing investment and consumption to data from the UK Family Expenditure Survey and by developing measures of the shadow price of housing that take into account uncertainty in house prices, interest rates and incomes, dynamic life cycle choices, and liquidity constraints that depend on both income and house value.

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File URL: http://cemmap.ifs.org.uk/wps/cwp0409_2.pdf
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Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP04/09.

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Date of creation: Jan 2009
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Handle: RePEc:ifs:cemmap:04/09
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  1. James Banks & Richard Blundell & Zoe Oldfield & James P. Smith, 2010. "House Price Volatility and the Housing Ladder," Working Papers 786, RAND Corporation Publications Department.
  2. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," CEPR Discussion Papers 1615, C.E.P.R. Discussion Papers.
  3. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  4. Richard Blundell & Martin Browning & Costas Meghir, 1993. "Consumer demand and the life-cycle allocation of household expenditures," IFS Working Papers W93/11, Institute for Fiscal Studies.
  5. James M. Poterba, 1992. "Taxation and Housing: Old Questions, New Answers," NBER Working Papers 3963, National Bureau of Economic Research, Inc.
  6. Ian Crawford, 1994. "UK household cost-of-living indices, 1979-92," Fiscal Studies, Institute for Fiscal Studies, vol. 15(4), pages 1-28, January.
  7. Campbell, John & Cocco, Joao, 2007. "How Do House Prices Affect Consumption? Evidence from Micro Data," Scholarly Articles 3122600, Harvard University Department of Economics.
  8. 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.
  9. Attanasio, Orazio P & Weber, Guglielmo, 1994. "The UK Consumption Boom of the Late 1980s: Aggregate Implications of Microeconomic Evidence," Economic Journal, Royal Economic Society, vol. 104(427), pages 1269-1302, November.
  10. Wenli Li & Rui Yao, 2007. "The Life-Cycle Effects of House Price Changes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1375-1409, 09.
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