User costs of housing when households face a credit constraint: Evidence for Germany

Abstract

We develop a formula for user costs of housing on the basis of a neoclassical approach to housing investmentwhich does not impose a perfect capitalmarket assumption. We suggest that the definition for the user costs of housing should be extended by an additional term which mirrors the credit constraints a household would be faced with. This extension term consists of the inflation gap between consumer and house price inflation multiplied by an average loan-to-value ratio and the real house prices. The empirical relevance of our finding is confirmed by a VECM. We provide evidence that the dynamics of residential investment in Germany are significantly influenced by the extended user costs (i.e. basic user costs plus the extension term) as well as by net financial wealth. A time series for the user costs of housing is calculated using this extended definition. © 2010 Springer-Verlag Berlin Heidelberg.