Flexibility and uncertainty in the housing market

This paper provides one reason why the level of trading in the housing market is volatile. We show that when uncertainty is high and can be expected to be resolved in the near future, both buyers and sellers have an incentive to postpone trading until uncertainty has been resolved. In the model, agents trade in the housing market either now, when there is uncertainty concerning the future tax rule for house owners, or later, when this uncertainty has been resolved. Under the assumption of risk neutrality (and high transaction costs), we show that any rational expectations equilibrium involves all trading being postponed. When agents are risk averse, this result holds less generally; we show that it does hold when changes in the tax rule are expected not to affect the future price of houses too strongly.