Inflation, the Stock Market, and Owner-Occupied Housing

This paper suggests that to a large extent. the increases in the value of housing and decreases in the value of corporate capital may have a common explanation, the inter- action of inflation and a nonindexed tax system. The acceleration of inflation has sharply increased the effective rate of taxation of corporate capital income, while reducing the effective taxation of owner- occupied housing. These changes have been capitalized in the form of changing asset prices. In the long run, they will lead to significant changes in the size and composition of the capital stock. The first section of the paper describes in more detail the nonneutralities caused by inflation. A simple model showing how inflation and taxation interact to determine asset prices is presented in the second section. The third section presents some crude empirical tests suggesting that increases in the expected rate of inflation may account for a significant part of the asset price changes which have been observed. A final section concludes the paper by commenting on some implications of the results.