(12) The first order conditions determine a savings schedule where the ratio between current and future expected consumption is as negative function of the real interest rate. With deposits in the utility function we capture the fact that deposits, apart from providing interest income, also provide liquidity services to the household. For constant prices and interest rates residential capital and consumption grow at equal rates. The elasticity of substitution between C and H determines how strongly the demand for consumption and housing reacts to relative price changes. Finally residential investment is a negative function of opportunity costs which consist of the nominal interest rate minus capital gains from expected increases in house prices. Land constitutes an asset for the household and arbitrage requires a return equal to the risk free rate.
