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A Simple Model of Housing Rental and Ownership with Policy Simulations

Publication Details

  • A Simple Model of Housing Rental and Ownership with Policy Simulations
  • Published: 24 Dec 2009
  • Status: Current
  • Authors: Coleman, Andrew; Scobie, Grant M
  • JEL Classification: R21; R31; R38
  • Hard copy: Available in Adobe PDF format only. HTML available on request from info@treasury.govt.nz.
 

A Simple Model of Housing Rental and Ownership with Policy Simulations

Published 24 Dec 2009

Authors: Andrew Coleman and Grant M. Scobie

Abstract

The housing market is both large and complex. This paper develops a simple model that captures the essential features of the supply and demand for housing, and which is used to evaluate the impact of a range of policy interventions. Increases in the stock of housing would reduce rents and house prices. A reduction in tax concessions for landlords would raise rents and moderate house prices. Additional subsidies for owner-occupancy would tend to reduce rents and raise house prices. Significant reductions in rents and house prices would follow a fall in the cost of housing, through, for example lower regulatory and consent costs. Falling real interest rates result in lower rents, higher house prices and lower owner-occupancy rates. Despite the widespread attention owner-occupancy rates have attracted, the paper concludes that they are not a particularly helpful guide to the state of the housing market. Typically they are quite insensitive to policy interventions, a result that follows from the integrated view of both the rental and ownership market, adopted in this study.

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1 Introduction

2 Existing studies

3 A graphical representation

4 The Model

  • 4.1 Demand to rent houses
  • 4.2 Demand to own houses
  • 4.3 Total demand for houses
  • 4.4 Supply of houses for rent
  • 4.5 Total supply of houses

5 Parameter estimates

6 Results

  • 6.1 An increase in housing supply
  • 6.2 An increase in the tax concession to landlords
  • 6.3 An increase in subsidies to owner-occupancy
  • 6.4 Increase in the cost of constructing a house
  • 6.5 Increase in real interest rates

7 Sensitivity to changes in the underlying assumptions

8 Conclusions

References

Appendices

  • Appendix A: Signs of the elasticities
  • Appendix B: Derivation of the values of key elasticities
twp09-05.pdf (386 KB) pp. i-iii,1–33

Acknowledgements

The initial version of this paper was developed when both authors were affiliated with the House Prices Unit in the Department of Prime Minister and Cabinet in 2007. The authors are indebted to their colleagues in that unit and to Duncan Maclennan for useful comments. Particular thanks are due to Professor John Creedy of the University of Melbourne who made extensive suggestions to improve the paper.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the authors. They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

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