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The Effects of Anticipated Inflation on Housing Market Equilibrium
Author(s) -
TITMAN SHERIDAN
Publication year - 1982
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1982.tb02226.x
Subject(s) - economics , monetary economics , inflation (cosmology) , renting , deductible , real interest rate , capital (architecture) , nominal interest rate , tax deduction , labour economics , interest rate , tax reform , state income tax , market economy , gross income , physics , archaeology , theoretical physics , political science , actuarial science , law , history
An increase in the anticipated rate of inflation causes distortions in the housing market due to a nonindexed tax system. Since nominal rather than real interest payments are tax deductible, an increase in inflation decreases the aftertax cost of capital for homeowners, which in turn increases the demand for housing and increases its real price. This tax gain is shown to be larger for rental housing than for owner‐occupied housing. In a competitive market, this implies that although the real price of housing increases with a rise in anticipated inflation, real rental rates fall.