Dynamic housing expenditures and household welfare

Laura Blow and Lars Nesheim
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Laura Blow: Institute for Fiscal Studies and University of Surrey

No CWP04/09, CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies

Abstract:

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.

JEL-codes: C88 D12 E21 R21 (search for similar items in EconPapers)
Date: 2009-01-25
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (7)

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