Inflation and Extraordinary Returns on Owner-Occupied Housing: Some Implications for Economic Stabilization and Efficiency

摘要

This paper estimates the gains from both expected and unexpected inflation for homeowners in different marginal tax brackets for different periods during the last 15 years. It also draws some implications of these gains for economic stabilization and efficiency. For houses held for various 6 - year periods between 1964 and 1978, real annual rates of return exceeded expected real returns by 3.5 to 9.5 percent. Expected inflation lowers the user cost of capital for owner - occupied housing; the higher the investor's tax bracket, the larger the reduction and the greater the demand for housing. At expected late 1978 inflation rates, the user cost of capital for those in high tax brackets is only 5 percent, compared to over 20 percent for corporate investments in structures. Favored tax treatment of owner - occupied housing causes significant productivity losses for the economy. Substitution of a tax credit for mortgage interest and property taxes and cessation of the double taxation of corporate income would produce a more efficient U.S. capital stock allocation. Preventing further acceleration of inflation would allow the value of corporate equities, which has been depressed for the last decade, to reflect the replacement costs of real corporate assets. This would reduce the misallocation of real capital. Much concern about rising housing costs seems to be based on measuring nominal, before - tax costs rather than real, after - tax costs. If the mortgage interest component of the consumer price index was computed appropriately, this index's rise between 1973 and 1979 would be 40 percent rather than the reported 55 percent. The annual inflation rate has been overstated by 2 percent throughout the last business cycle. Tables, a chart, footnotes, and 19 references are included.