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In Search of Empirical Evidence that Links Rent and User Cost

  • Dixie M. Blackley
  • James R. Follain
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    Most models of the rental housing market assume a close linkage between the level of residential rents and the after-tax user cost of rental housing capital. However, little empirical evidence exists to establish the strength of this linkage or the speed with which rents adjust to changes in user cost or tax policy. This paper develops and estimates an econometric model of the rental housing market in order to shed light on both of these issues. United States annual data for 1964 through 1993 are used to generate two-stage least squares estimates of a four equation structural model. Although the results are generally consistent with expectations and reveal several interesting relationships among the system variables, the estimates fail to identify a strong relationship between rent and user cost. About half of an increase in user cost is ultimately passed along as higher rent. The adjustment process also takes a long time, with only about a third of the long-run effect realized within ten years of a user cost shock. The fundamental reason for this result is that our estimate of the user cost series, based upon widely accepted procedures, is much more volatile than the residential rent series.

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    File URL: http://www.nber.org/papers/w5177.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5177.

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    Date of creation: Jul 1995
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    Publication status: published as Regional Science and Urban Economics, vol. 26, no. 3-4, pp. 409-431, June 1996
    Handle: RePEc:nbr:nberwo:5177
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.orgEmail:


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    1. Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 729-52, November.
    2. Alm James & Follain James R., 1994. "Shocks and Valuation in the Rental Housing Market," Journal of Urban Economics, Elsevier, vol. 36(2), pages 117-142, September.
    3. David C. Ling, 1992. "Real Estate Values, Federal Income Taxation, and the Importance of Local Market Conditions," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(1), pages 125-139.
    4. Mankiw, N. Gregory & Weil, David N., 1989. "The baby boom, the baby bust, and the housing market," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 235-258, May.
    5. Follain James R. & Leavens Donald R. & Velz Orawin T., 1993. "Identifying the Effects of Tax Reform on Multifamily Rental Housing," Journal of Urban Economics, Elsevier, vol. 34(2), pages 275-298, September.
    6. Turnbull, Geoffrey K., 1988. "Market structure, location rents, and the land development process," Journal of Urban Economics, Elsevier, vol. 23(3), pages 261-277, May.
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