Introducing Risky Housing and Endogenous Tenure Choice into Portfolio- Based General Equilibrium Models

35 Pages Posted: 18 Apr 2007 Last revised: 13 Jul 2010

See all articles by Patric H. Hendershott

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Yunhi Won

affiliation not provided to SSRN

Date Written: September 1989

Abstract

Portfolio-based general equilibrium models are useful for analyzing the interaction between the structure of individual tax rates and the wayparticular assets are taxed, for considering the role of differential tax rules and risk in determining household portfolio choices, and for addressing distributional questions. Unfortunately, current versions of these models give housing short shrift; owner housing is assumed to be riskless, rental housing is not a separately identifiable asset, and tenure choice is of necessity exogenously determined. This paper shows how these models can be extended to incorporate a full housing subsector and uses an extended version of the Galper-Lucke-Toder (GLT) model to analyze the impact of the 1986 Tax Act. The interest rate impacts of the extended model are similar to those of GLT: a sharp decline in the fully taxable rate (just over a percentage point), a noticeable fall in the corporate equity rate (two-thirds of a point) and increases in the returns on noncorporate equity and tax-exempt bonds. The capital stock effects are different owing to endogenous tenure choice, the riskiness of owner housing, and the smaller initial holdings of owner housing by high income households. The owner housing stock increases by 3 percent, the increase corning roughly 50/50 from rental housing and state and local capital. The homeownership rate rises by one-half percentage point, virtually all of the increase occurring for households with incomes under $30,000. The small utility gains, $14 billion, are roughly comparable to those of the GLT model. While most of the gains go to high income households, other households also gain, unlike the results originally reported in GLT, which contained computational errors.

Suggested Citation

Hendershott, Patric H. and Won, Yunhi, Introducing Risky Housing and Endogenous Tenure Choice into Portfolio- Based General Equilibrium Models (September 1989). NBER Working Paper No. w3114, Available at SSRN: https://ssrn.com/abstract=980433

Patric H. Hendershott (Contact Author)

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yunhi Won

affiliation not provided to SSRN

No Address Available

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