This paper empirically investigates the impact of inflation on homeownership returns and tenure choice when the assumptions underlying the user cost of housing are modified to reflect separately the effects of unanticipated and anticipated inflation. The analysis demonstrates that when the user cost model is specified to reflect the impact of anticipated inflation on house prices, the mortgage interest rate and the capitalization rate, the returns to homeownership are lower than determined by previous user cost studies and are consistent with a reasonably efficient market.