Effects of policy changes on property prices— A simulation model

Abstract

This paper presents a simulation model designed to predict the impact of policy changes on prices and quantities of owner‐occupied housing in the short and long run. Because liquidity considerations are important, house prices are assumed to depend on cash flow. The model predicts that elimination of interest subsidies in Sweden would cause a 10% short‐run decrease in price for new houses, but that prices would not change for old houses. In the long run, the volume of owner‐occupied housing would decline substantially and prices of old houses would increase by 15–20 %. Introduction of a property tax or a decrease in inflation are predicted to decrease house prices in the short run and to increase them in the long run as the volume of owner‐occupied housing shrinks.