A Note on Inflation and Relative Tenure Prices

This article develops a simplified model of housing costs to analyze the effects of the expected rate of inflation on residential tenure choice. Inflation, working though the Federal Tax Code, affects a number of the components of housing costs in ways which vary between tenure modes. On net, the tax subsidy to owner-occupancy is more positively leveraged with respect to expected inflation than are tax preferences for rental residential real estate. In fact, it is likely that higher expectations of inflation will reduce the after-tax cost of owner-occupied housing.