This paper analyzes the impact of inflation and tax policy on the housing market using an asset market model. It examines how changes in the expected inflation rate affect the real price of houses and the equilibrium size of the housing capital stock. The model suggests that rising inflation reduces the effective cost of homeownership by allowing tax deductions for mortgage interest payments and making capital gains from homeownership essentially untaxed. This leads to a lower real cost of homeownership, which can increase the real price of houses. The study finds that the real price of owner-occupied houses rose by 30% during the 1970s housing boom, partly due to high inflation rates and the tax deductibility of nominal mortgage payments. The model also shows that persistent high inflation rates could lead to a significant increase in the stock of owner-occupied housing. The paper uses simulations to demonstrate that a 30% increase in real house prices could be attributed to the user cost decline of the late 1970s. It highlights the role of inflation in determining the tax subsidy to owner-occupation and indicates that changes in the inflation rate in the early 1980s may significantly affect the desirability of homeownership. The model distinguishes between the market for existing houses and the market for new construction. It shows that the real price of houses depends on the expected future path of construction activity and that the assumption of perfect foresight ties the economy to a stable transition path. The paper also discusses the effects of credit rationing on the housing market and the importance of considering the interaction between structures and land in the housing model. The results suggest that the tax system's treatment of inflation can have significant effects on the relative value of different household portfolio assets. The study concludes that the tax code should be adapted to a period of rising prices to avoid large effects on the intersectoral allocation of capital.This paper analyzes the impact of inflation and tax policy on the housing market using an asset market model. It examines how changes in the expected inflation rate affect the real price of houses and the equilibrium size of the housing capital stock. The model suggests that rising inflation reduces the effective cost of homeownership by allowing tax deductions for mortgage interest payments and making capital gains from homeownership essentially untaxed. This leads to a lower real cost of homeownership, which can increase the real price of houses. The study finds that the real price of owner-occupied houses rose by 30% during the 1970s housing boom, partly due to high inflation rates and the tax deductibility of nominal mortgage payments. The model also shows that persistent high inflation rates could lead to a significant increase in the stock of owner-occupied housing. The paper uses simulations to demonstrate that a 30% increase in real house prices could be attributed to the user cost decline of the late 1970s. It highlights the role of inflation in determining the tax subsidy to owner-occupation and indicates that changes in the inflation rate in the early 1980s may significantly affect the desirability of homeownership. The model distinguishes between the market for existing houses and the market for new construction. It shows that the real price of houses depends on the expected future path of construction activity and that the assumption of perfect foresight ties the economy to a stable transition path. The paper also discusses the effects of credit rationing on the housing market and the importance of considering the interaction between structures and land in the housing model. The results suggest that the tax system's treatment of inflation can have significant effects on the relative value of different household portfolio assets. The study concludes that the tax code should be adapted to a period of rising prices to avoid large effects on the intersectoral allocation of capital.