Consider an individual weighing a residential investment who has access to a bank offering interest rate R on savings and loans. Buying the house requires a 20% down payment, D, with mortgage payments subsidized by the government at rate T. Owning the house would allow the individual to earn rent Y each period and experience capital gains, denoted by G. Assume the home being considered is sufficiently well built that depreciation is not a factor.

(A) Write down the residential investment arbitrage equation and explain its meaning.

(B) Following a major housing crisis, the government decides to cut back its subsidies for homeownership by reducing T. Using the Arbitrage equation, explain what happens to house prices after the policy change. Does the policy change affect originally expensive versus inexpensive homes differently? Explain your answer.