Abstract for: Renting versus Buying: System Dynamics Approach to Housing

This paper studies a widespread and important life dilemma of renting and buying a home. We adopt a system dynamics approach to housing research and clarify the benefits of system dynamics and double-entry bookkeeping in modeling the determinants of buying and renting a home decision. We included all important inflows and outflows of money and accumulation dynamics of assets, liabilities and equity for both dilemma choices. The model is general in the sense that one can use data from any market, but in this paper the parameters are estimated using Croatian historical data. We consider two policy scenarios; one in which there are tax deductions on interest payments, and the other without the tax policy measure. Our results suggest that the renting scenario is optimal in comparison to the buying scenario when there are no tax deductions on interest payments. This suggests that tax deductions should be introduced in case the government wants to stimulate the real estate market and the construction sector, or abandoned if the government perceives a housing bubble is being supported by a certain tax policy.