The Australian Economic Review, vol. 39, no. 1, pp. 14–34 © 2006 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research Published by Blackwell Publishing Asia Pty Ltd Abstract This article develops a microsimulation model of the Australian housing market that has ten- ure choice as its principal focus. The article sheds light on the role played by relative prices, wealth and borrowing constraints in shaping housing tenure choices. We explore the model’s capabilities as an aid to policy making by reporting the findings from an im- pact analysis of grant programs designed to ease the transition of first home buyers into owner occupation. We find a large demand for home ownership that is not met because of bor- rowing constraints. The need to meet financial institutions’ down payment requirements is particularly important. Government grants made available to first home buyers will ease down payment requirements, but the formal in- cidence of such a subsidy is found to be inequi- table among potential first home buyers, and its impact is largely to bring forward purchase decisions. 1. Introduction This article develops a microsimulation model of the Australian housing market whose princi- pal focus is to predict the housing tenure con- sequences of housing policy actions and housing market shocks. Our research is moti- vated by two aims. First, the model is designed to shed light on the role played by relative prices, wealth and borrowing constraints in shaping housing tenure choices. The microsim- ulation approach has the virtue of facilitating analysis of the types of households that are vul- nerable to rationing due to borrowing con- straints, which have been emphasised in more recent studies of tenure choice (Gyourko 2003). Second, the microsimulation model is capable of estimating the impact of govern- ment intervention on housing market out- comes, and tenure choice in particular. We explore the model’s policy impact measure- ment capabilities by reporting the findings from analyses of an Australian federal govern- ment grant program, introduced to offset the net price effect from the indirect tax changes that were part of the federal government’s July 2000 New Tax System reforms, and thereby ease first home buyers’ transition into owner occupation under the new fiscal arrangements. The First Home Owner Grant (FHOG) pro- gram offered the first home buyers of newly constructed property a grant of up to $14 000, a sum that has subsequently been wound back to $7000. Our microsimulation model brings together the supply and demand sides of the Australian housing market by estimating the prices and Microsimulation Modelling of Tenure Choice and Grants to Promote Home Ownership Gavin Wood, Richard Watson and Paul Flatau* School of Social Sciences and Planning, RMIT University; Treasury, State Government of Western Australia; and Murdoch Business School, Murdoch University, respectively * We are grateful to the Australian Housing and Urban Re- search Institute for providing financial assistance to sup- port the research upon which the article is based. Judith Cockburn-Campbell, Matthew Forbes, Sarah Hickson and Rachel Ong provided valuable research assistance. The au- thors are grateful to Pat Hendershott and an anonymous referee for helpful comments and Alice Stoakes who ably assisted with the preparation of the manuscript. The normal disclaimer applies.