RDP 8907: Tax Policy and Housing Investment in Australia Appendix IV

THE STEADY STATE SOLUTION

When the housing market is in steady state equilibrium the quantities of land and housing structures are constant over time. The shadow prices of land and housing are also constant. These conditions are met when equations (7), (9), (13) and (14) are set equal to zero:

We can derive three equations in five unknowns from the above equations:

The parameters A, β and Ø are unknown as are the steady state values of m^k and m^L. Ø was chosen to generate adjustment costs of ten percent in the steady state. This value was not estimated due to econometric difficulties but the value is plausible in relation to Australian work done on adjustment costs by McKibbin and Siegloff (1987). Assuming the value of one parameter allows the other parameters to be calculated given our values chosen for inflation, tax rates and inflation rates. The proportion of income received by land rather than housing structures, α, was estimated to be approximately a half based on house prices and vacant land prices compiled by Bis Shrapnel (1989).