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Mortgage Interest Deductions and Homeownership: An International Survey
Abstract
The aim of this paper is to review the international evidence on the impacts of mortgage interest deductions (MID) on homeownership rates. To understand the relationship between the deductions and ownership rates, we develop a model of housing tenure choice. In that model, the probability of becoming a homeowner is a function of the relative cost of owning and renting, borrowing constraints, household income, and a set of taste variables. The relative cost of owning and renting is a function of house prices and the annual user cost of owner-occupied housing. Tax policies affect the user cost of owner-occupied housing and, in turn, the probability of becoming a homeowner. They also affect the price of housing due to capitalization effects. The empirical evidence suggests that, contrary to popular wisdom, the deduction generally does not increase the ownership rate. This result is likely due to the fact that the MID is capitalized into house prices, especially where housing supply is inelastic.
... Coupled that with 34% of firms reporting that they face client demand for greener buildings, many construction firms fear that they will be caught in the middle of demand and high costs (Blaxter et al, 2018). Owners of a green building feel they are worth 7% more than a traditional one, which is likely due to the reduced operating costs that result from building energy-efficient structures (Bourassa, Donald, Patric, & Martin, 2012). ...
This study assessed the environmental demands and strategies for implementing sustainable building construction
practices in Enugu State.The study was carried out in Enugu State, Nigeria. The Study adopted a descriptive
survey research design. Two research questions guided the study. The population of the study involved 1,024
respondents consisting of 316 Architects and 708 Civil Engineers. A sample of 288 respondents comprising of 121
Architects and 167 Civil Engineers, were drawn using simple random sampling technique. The sample size of 288
respondents was gotten using the Taro Yamane formula for sample size. A questionnaire consisting of 22 items
titled: Questionnaire On Assessing Environmental Demands and Strategies for Implementing Sustainable Building
Construction Practices(Q.A.E.D.S.I.S.B.C.P) was used to elicit information from the respondents. The
questionnaire was validated by three experts. The five-point Likert type scale of Strongly Agree (5), Agree (4),
Undecided (3), Disagree (2), & Strongly Disagree (1) was employed in the design of the instrument. Cronbach
alpha was used to determine the reliability of the instrument which yielded 0.972 coefficients. The result of the
study was analyzed using Mean Statistics. The study identified that minimizing building construction waste, training
and retraining of building practitioners in line with latest practices in sustainable construction will promote
sustainable building construction practices in Nigeria. The study recommended among others that government
should do more to market incentive schemes across the construction industry in order to increase the awareness
of sustainability for building stakeholders.
... With regard to the latter, we note that in a housing market, an MID may only affect homeownership if supply can react as it otherwise mainly affects prices (see also Stadelmann and Billon (2012) and Stadelmann and Billon (2015) 3 who address the supply constraints/elasticity issue in their studies around the capitalization effects of fiscal variables). Bourassa et al. (2013) who review international evidence, document that two U.S. homeownership studies take into account the capitalization effect of MID. First, Bourassa and Yin (2008), who use AHS microdata from 1998 for eleven metropolitan areas, conclude that an MID has an adverse impact on the homeownership attainment of young adults since it inflates house prices. ...
This article provides new European evidence about the relation between the much discussed mortgage interest deduction (MID) and homeownership. We also examine which household-group, based on income or marital status, is (mainly) encouraged via this fiscal relief to own a home. To do so, we estimate multilevel mixed-effects logistic regressions by using Eurostat EU-statistics on income and living conditions data in twelve countries over 2003-2018. Our quantitative study shows that an MID generally fails to advance its purpose of promoting homeownership, likely due to price capitalization. However, our results underscore that there is (substantial) variation across household groups. From the odds ratios, we conclude that the intended positive effect of an MID on homeownership probability occurs only for the highest-income households; those who need the most help with good-quality affordable housing are the most discouraged via this relief to become a homeowner. Since the continuation of an MID remains one of the contested issues in many national debates, our empirical findings provide useful insights for governments around the world that wish to promote homeownership through tax incentives.
... A tax-deductible mortgage rate reduces the user cost of owner-occupied housing and favours owneroccupied housing over rental directly. A tax-deductible mortgage rate is a type of policy analysed by many papers (Poterba & Sinai, 2008;Bourassa et al., 2013;Hanson, 2012;Hanson & Martin, 2014;Splinter, 2019;Karlman et al., 2021). Likewise, property tax, or tax on housing equity (gains), affect homeownership by increasing the user cost of owneroccupied housing, impacting house price growth and divergence of asset accumulation across groups of households with different forms of tenure (Weiss, 1978;Bai et al., 2014;Bhutta & Keys, 2016). ...
This paper analyses a set of housing market policies in an augmented DiPasquale-Wheaton (ADPW) model where the price-rent (PR) ratio ensures housing market equilibrium across different types of tenure. The aim of the paper is educational, putting several housing market policies into a comprehensive context where the rental housing market, the housing construction industry and the market for owner-occupied housing are interrelated. Housing market dynamics takes both direct and indirect effects into account. The paper finds that introducing tax-deductible mortgage interest rates has a positive effect on house prices. This policy stimulates housing starts and pushes down rental prices. A property tax has a negative effect on house prices while lifting the rental price as the housing industry contracts. Social housing policy interventions on the supply side of the housing market partly crowd out commercial housing supply. Demand-side vouchers have stronger short-run effects as long-run effects incorporate the housing construction industry’s reaction to house price signals. Finally, rental subsidies create a gap between the rent paid by a tenant and the rent received by a landlord. The aggregate effect of a rental subsidy is related to the elasticities of supply and demand, where not only renters, but also homeowners and landlords, may benefit when supply and demand are very elastic.
... Using 1989 American Housing Survey (AHS) data for eleven metropolitan areas, Bourassa and Yin [30] concluded that removing the deduction would only have reduced the ownership rate of young households by less than one percentage point. However, Bourassa et al. [31] noticed that these two above-mentioned U.S. studies neglected the likelihood that an MID is at least partly capitalized into house prices: an MID allows for lower mortgage payments, and thus a homebuyer's ability to pay is consequently higher, which would ultimately translate into higher house prices (see Damen et al. [32] and Vangeel et al. [16]). In contrast, Bourassa and Yin [30] did pay attention to this house price capitalization issue, and working on 1998 AHS microdata for eleven metropolitan areas, these authors concluded that mortgage interest and property tax deductions have an adverse effect on young households' homeownership attainment due to effects on house prices. ...
This multi-country article focuses particularly on homeownership among the young. After all, relying on European Union Statistics on Income and Living Conditions (EU-SILC) data in twelve European countries, we can see that in contrast to the aggregate homeownership rate of ‘all’ households (i.e., no matter what age the households’ heads are) that has remained relatively stable, the aggregate homeownership rate of young households (with heads aged 0–35 years) has fallen substantially in Europe in recent decades. Multiple analyses and quantitative comparisons confirm the stylized fact that acquiring a home has indeed become a challenge for young adult households (also no matter the income quartile in which they fall); rather than that, however, their lowering homeownership rates are simply due to changing sociodemographic characteristics (such as having children later in life and staying longer in education). Moreover, it is unveiled that young tenants and lower income young households are especially disadvantaged with regard to access to the housing market. Through our actual research, we aim to answer the question: Has the government’s fiscal policy strengthened or weakened the declining trend in young people’s homeownership? After all, some evidence exists of an MID having a perverse effect, i.e., capitalizing on higher housing prices. However, multilevel mixed-effects logistic regressions reveal that the use of a mortgage interest deduction (MID) has had a significant positive effect on young adults’ homeownership probability—with the strongest effect for the highest incomes. We believe that all the above results are—in the first place—relevant for governments that are willing to stimulate homeownership. They indicate that some (additional) policy interventions are indeed needed, next to or instead of granting an MID, and that the focus of housing policy should also (and more) be on tenants and those with lower incomes.
... Plenty of evidence suggests that housing is an important determinant of social and economic outcomes (Aaronson, 2000;Dietz and Haurin, 2003;Engelhardt et al., 2010;Coulson and Li, 2013). Homeownership brings many economic benefits, such as wealth accumulation (Turner and Luea, 2009), mortgage interest deduction (Bourassa et al., 2013) and increased consumption (Chen et al., 2020), as well as social benefits, such as better citizenship (DiPasquale and Glaeser, 1999), improved self-esteem and subjective wellbeing (Hu and Ye, 2020), improved neighbourhood conditions (O'Sullivan and Gibb, 2012), higher quality of home environment, better child outcomes (Haurin et al., 2002) and other external benefits (Coulson and Li, 2013). Housing assistance policies that increase access to homeownership for low-income households are also proved to have positive effects on households' socioeconomic outcomes and wellbeing (Beer et al., 2011;Van Dijk, 2019). ...
This study examines the effects of housing difficulties on life satisfaction. By using longitudinal data from the China Family Panel Studies survey, we find strong evidence that households who experience housing difficulties are less satisfied with their lives than those who do not after controlling for a wide range of household demographic and socioeconomic characteristics and county and year fixed effects. Our estimated results are robust to unobservable household characteristics, model misspecification and selection bias. We also provide explanations for the negative effects of housing difficulties on life satisfaction through which housing difficulties are detrimental to physical and psychological health. Life satisfaction remains negatively associated with housing difficulties even after controlling for health status.
... In Norway, Stamsø (2008) suggests that housing grants provided to lower-income households have successfully enhanced vertical equity but not horizontal equity. Regarding financing-oriented demand-side measures, scholars suggest that the mortgage interest deduction does not effectively increase homeownership; rather, it has consistently been shown internationally that it increases housing prices, especially in areas with inelastic supply (Hilber, 2007;Bourassa et al., 2013;Hilber and Turner, 2014). Hoek-Smit and ...
We synthesize the vast, international scholarly literature related to the growing problem of housing affordability. As a foundation for assessing both the causes of housing affordability problems and possible policies for alleviating them, we take a systematic, holistic perspective and specify nine structural relationships for a metropolitan area that comprehensively delineate the determinants of housing affordability. We discuss concepts and measures of housing affordability, evidence on the primary causes and effects of unaffordable housing, alternative policy approaches, potential future trends in affordability, and suggestions for further research. While focusing on the most recent, high-quality empirical evidence, we also rely on previously published reviews and seminal papers in order to provide historical perspective on how the literature has evolved. Our reconnaissance of the international literature since 2008 demonstrates that although evaluation research in the context of western, developed countries’ housing policies has dominated, increasingly such research has emerged from other countries.
Highlights
• We discuss how to frame housing affordability issues, synthesize evidence from the relevant literature, and propose directions for future research.
• We take a holistic perspective to understand causes of housing affordability problems and assess policy responses.
• Our review of the international scholarly literature encompasses the evidence from non-western, developing countries.
• Despite the extensive literature, there remain unexplored questions and emerging topics.
An important feature of China’s housing market is the coexistence of a high house-price- to-income ratio and high homeownership rates. The purpose of our study is to reveal the root causes of this paradox from a new perspective and theoretical foundation. Based on questionnaire data from Hangzhou and logistic regression models, our research finds that the most important factors driving middle and lower-income groups to buy homes are its unique household registration and school district housing system, underdeveloped housing rental market and inadequate regulatory system, and the wealth appreciation effect caused by the continued rise in housing prices. Furthermore, intergenerational wealth transfers, private lending, and China’s generous home mortgage policies have made homeownership possible for this groups. However, the high house-price-to-income ratio leads to heavy financial pressure on the middle- and low-income groups and is not conducive to sustainable and healthy economic development. To this end, we suggest that the government accelerate the equalization of public services, improve the regulatory system governing the rental housing market, and control the unreasonable rise in housing prices and diversify investment channels for residents.
Despite the central role that landlords, or residential rental property owners (RRPOs), play in housing, important areas of RRPO decision making are not well understood. Because of the importance of RRPOs in the housing system, gaps in our knowledge leave planners at a disadvantage when creating policies to improve housing stability for tenants. This article is a comprehensive, interdisciplinary literature review of RRPO characteristics and behavior framed around three decision points: career lifecycle, portfolio maintenance and development, and property operations. This review ends with suggestions for an RRPO-focused research agenda that supports urban resiliency and housing stability for renters.
This paper assesses to which degree housing purchase subsidies are capitalized into property prices. Using a large-scale micro-dataset on German house prices, I exploit the introduction of a new subsidy scheme in the state of Bavaria. My difference-in-difference estimations at the Bavarian interstate border indicate that the prices of single-family homes increased by approximately 10,000 euros more in Bavarian border regions. This is consistent with a full capitalization of the subsidy. No effect is found for apartments, whose purchasers seldom qualify for the subsidy. A heterogeneity analysis confirms that the price effect is larger in segments of the real estate market with a higher exposure to the subsidy scheme. I also provide suggestive evidence that the subsidy scheme slightly stimulated construction activity. Overall, my results indicate that instead of making house purchases more affordable for families, the subsidy scheme led to a rise in house prices and mainly benefited sellers of properties.
In a large majority of European countries, a tax relief on mortgage interest payments is granted in order to enhance homeownership. Although there is a common belief stating that a mortgage interest deduction (MID) is capitalized into house prices, empirical evidence remains scarce. Therefore, our paper is about the influence of this fiscal relief on house prices. The scope of our analysis includes fourteen European countries, for which an unbalanced panel dataset over the period 1990–2015 is constructed. All our regression results support the hypothesis that a MID has had a significant price-increasing effect in the selected countries over the observed period. However, this result does not hold for a MID in the countries where a dual income tax (DIT) is applied, suggesting a significant difference between tax systems. These results are relevant for governments because there has been much debate about whether and to what extent countries should limit its MID over the last decades.
We study if and how the structure of EU housing markets, particularly the role of structural breaks and the institutional characteristics of national residential mortgage markets across the EU countries affects the EU housing prices before the financial crisis of 2008. We document three main features: first, the institutional characteristics of residential mortgage markets differ markedly across EU countries; second, and according to a wide range of indicators, the increase of housing prices is significantly stronger in those countries where the credit policy characteristics are less conservative; third, for the majority of EU countries, we find evidence of structural breaks in EU housing markets that often coincide with a housing market policy change.
Housing provision, is a capital intensive, which requires huge financial obligations, the requirement that is tough to meet by many households, thereby leading to ever-increasing housing stock deficit in Nigeria. Over the years, government made some efforts trying to meet up with housing finance demands of the citizens through the creation of mortgage institutions to mobilise and facilitate housing finance, delivery and ownership, especially among the low and medium income groups. Despite all efforts, conditions attached to housing finance, accessibility remained a clog in the wheel of housing provision and ownership to especially low and medium income groups. The purpose of this research is to investigate accessibility of Primary Mortgage Institutions housing finance by potential consumers. The paper explored qualitative research methodology in data collection and analysis using Nvivo tool. It was found, conditions attached to housing finance accessibility remained the primary factor that deprived most of the prospective borrowers. Therefore, accessing housing finance from the Primary Mortgage Institutions remain a key challenge to most low and medium income groups which also hampered housing provision and ownership.
Der Erwerb eines Eigenheims ist die finanziell anspruchsvollste und folgenreichste Entscheidung im Leben der meisten Bürgerinnen und Bürger. Der Kaufpreis einer Immobilie übersteigt das verfügbare Eigenkapital in der Regel um ein Vielfaches. Zur Finanzierung ist deshalb die Aufnahme eines Hypothekendarlehens erforderlich. Die daraus resultierenden finanziellen Verpflichtungen bestehen über einen Zeitraum von mehreren Jahrzehnten fort. Während dieser Zeit muss das Haushaltseinkommen stets hoch genug sein, um die Kreditraten bedienen zu können und trotzdem genügend Geld „zum Leben“ zu haben. Einkommen und Vermögen sind jedoch innerhalb der Marktwirtschaft ungleichmäßig verteilt, sodass nicht jeder Haushalt der finanziellen Belastung des Wohneigentumserwerbs gewachsen ist. Werden Immobilienkredite auf breiter Front zu leichtfertig vergeben, können finanzierende Banken in Schieflage geraten und die Finanzmarktstabilität gefährdet sein.
The mortgage interest deduction (MID) is the largest source of US federal homeowner support. I estimate that this tax expenditure fluctuated between 0.2 and 0.9 percent of gross domestic product (GDP) over the past five decades. About half of these fluctuations were caused by changes in tax policy, rather than changes in the housing market. Fluctuations in the MID tax expenditure do not tend to move with homeownership rates; instead, they are procyclical, meaning the MID may exacerbate business cycles.
In this paper, we focus on the tax deductibility of mortgage loans, which is a key measure of housing policies in many countries. Several studies have shown that the distribution of the benefits of this measure runs counter to the vertical equity principle. We contribute to the existing literature by addressing the distribution of the tax deductibility of mortgage loans considering the spatial outcomes of this policy. We use Belgian data to measure the impact of this policy on households' income and inequality and poverty in different types of areas. We show that this measure favours suburban households and subsidizes urban sprawl. Exogenous factors such as past housing policies and homeownership determinants play a key role in this phenomenon. We also simulate the distributional impact of three stylized reforms of the deductibility of mortgage loans in Belgium. These simulations show that the distributional outcomes could be improved on both social and spatial sides.
Although the mortgage interest deduction enjoys broad public support, critics argue that the policy disproportionately benefits wealthy households, fails to expand homeownership opportunities to households on the margins, and costs the federal government an extraordinary amount of money in foregone tax revenue. Drawing on data collected through an online experiment, this analysis tests the sensitivity of public support to these critiques. The findings reveal that support for the mortgage interest deduction declines when respondents are presented with information about the cost, effectiveness, or distribution of benefits associated with the deduction. Support among renters is more sensitive to framing effects than that among homeowners. Republicans are less sensitive to framing effects than Democrats when the deduction is framed as distributing benefits unequally, but more sensitive to these effects when the issue is framed as costly. However, all groups register their lowest level of support when told that the mortgage interest deduction is not an effective tool for expanding ownership opportunities.
Perhaps the most common finding relating housing to the labour market is that high home-ownership rates are associated with higher unemployment. In contrast, recent micro-evidence suggests that home-owners have relatively favourable labour market outcomes. We explore the effect of home-ownership on unemployment exploiting a rental housing market deregulation reform which created exogenous variation in home-ownership across regions, allowing us to avoid the endogeneity problem in earlier studies. While home-owners are less likely to experience unemployment, an increase in the home-ownership rate causes unemployment to rise. Externalities arising from consumption reductions and increased job competition may explain the conflicting evidence.
Homeownership is an important component of the New Zealand lifestyle. In recent decades, however, the ownership rate has been declining and the reasons are poorly understood. This paper explains the decline using a decomposition technique that has been applied in other contexts. We find that borrowing constraints and ethnicity have been particularly important contributors to the decline. Rapidly rising house prices clearly have played a major role in the inability of income to keep up with prices and the increased impact of borrowing constraints. We also show that the increased down payment requirements imposed by the Reserve Bank of New Zealand in 2013 are unlikely to have affected the ownership rate.
We study the impact of housing conditions on the educational outcomes of young persons in Switzerland. We focus on children aged 15–19, who are potentially enrolled in or graduates of high school or vocational training programs, and young adults aged 20–24, who are potentially students in or graduates of university or other tertiary institutions. Housing conditions are characterized in three ways: whether the parents rent or own the dwelling, the type of dwelling (house or apartment), and a measure of crowding (occupants per room). We find that the density of residents in the dwelling is the only influential housing characteristic. Crowding directly affects the outcomes of children aged 15–19 and presumably indirectly affects the outcomes of young adults given that admission to university study requires completion of high school. None of the other housing characteristics affects children’s outcomes. In particular, homeownership is not statistically significant in any of our estimations.
This paper offers an empirical test of the effect of the mortgage interest deduction (MID) on both the extensive (own vs. rent) and intensive (size of home) housing purchase margins. Using state level differences in MID availability to identify, I examine this relationship using standard ordinary least squares, instrumental variables, regression discontinuity, and sample selection estimation techniques. I find the MID to be responsible for a 10.9–18.4% increase in the size of home purchased, but that no relationship exists between the MID and home ownership. These results imply an elasticity of home size with respect to changes in user cost between −1 and −1.4.
This paper examines the impact of the combined U.S. state and federal mortgage interest deduction (MID) on homeownership attainment, using data from 1984 to 2007 and exploiting variation in the subsidy across states, over time and due to inter-state moves. We test whether capitalization of the MID into house prices offsets the positive effect on homeownership. We find that the MID only boosts homeownership attainment of higher income households in less tightly regulated housing markets. In more restrictive places - typically larger coastal cities - an adverse effect exists. The MID is an ineffective policy to promote homeownership and improve social welfare.
During the last quarter century, mortgage interest deductibility has been gradually phased out. In 1974 a ceiling was set on the size of the mortgage eligible for interest deductibility (Å“30,000 since 1983) and, beginning in 1993, the maximum rate at which interest under that ceiling could be deducted was reduced in four steps to zero in 1999. The combination of these changes gives a rich array of different debt tax penalties for different households in different years. We analyze over 117,000 loans originated in the UK during the 1988-91 and 1995-98 periods to finance home purchases. We first estimate a logit to predict whether a household's loan exceeds the Å“30,000 ceiling. These predicted probabilities are then employed to construct debt tax penalty variables that are used to explain household LTVs on loans to finance home purchases. The penalty variables depend on the predicted probability of having a loan that exceeds the ceiling, the market mortgage rate, and exogenous household specific tax rates. From these results we compute estimates of the impact of removing deductibility on initial LTVs in the UK and on the weighted average cost of capital for owner-occupied housing. Removal of deductibility is estimated to reduce initial LTVs, which mitigates the rise in the weighted average cost of capital, by about 30 percent, with the reduction varying with household age, loan size (above or below the Å“30,000 limit) and tax bracket.
In this paper we analyze the factors that affect the tenure choice of young adults, highlighting the impact of mortgage lender imposed borrowing constraints. The data set is a panel of youth age 20-33 for the years 1985-90. Our methods differ from most prior studies in many ways including consideration of possible sample selection bias, a richer model of the stochastic error structure, better measurement of which households are bound by borrowing constraints, and a fuller consideration of the endogeneity of wealth and income. Once all changes are implemented, we find ownership tendencies to be quite sensitive to economic variables. Specifically, potential earnings, the relative cost of owning a home, and especially borrowing constraints affect the tendency to own a home. In our sample of youth, 37% of households are constrained even after choosing their loan-to-value ratio to minimize the impact of the separate wealth and income requirements. The constraints reduce the probability of ownership of these households by 10 to 20 percentage points (a third to a half) depending on the particular characteristics of the household.
Capital investment tax provisions have been changed numerous times in the last decade, with depreciation tax lives shortened in 1981 and lengthened ever since and capital gains taxation reduced in 1978 and 1981 and now increased. The first part of this paper analyzes these changes and attributes a large part of them, including the 1986 Tax Act, to changes in inflation: tax depreciation schedules and capital gains taxation that look reasonable when the tax depreciation base is being eroded at ten percent a year and an overwhelming share of capital gains is pure inflation take on a different appearance when inflation is only four percent. The remainder of the paper critiques the typical project model used to compute impacts of tax changes on real estate and report simulation results using a modified model.
This paper contains three parts: a discussion of the tax advantages of household capital (owner-occupied housing and consumer durables) relative to business capital (structures and producers durables) ,an analysis of alternative mechanisms for reducing these advantages (including the use of the mechanisms since 1965) ,and a brief enumeration of various attempts to lower the residential mortgage rate relative to other debt yields that have been employed during the past two decades or are currently being advocated.
The aggregate homeownership rate in the United States has continued to rise throughout the 1970s despite rising inflation and the rapid growth of young and primary individual households with relatively low homeownership rates. This appears to be a result of a decline in the cost of homeownership relative to renting. The post 1965 decline in the real after-tax interest rate has acted to reduce the costs of both types of housing. However, inflation, and legislation induced increases in taxation of rental housing have largely offset the decline in the net real financing rate. Depreciation is based on historic cost and nominal capital gains are taxed. Moreover, this taxation was increased in 1969 and 1976 with the introduction and expansion of the minimum tax, the increased recapture of accelerated depreciation, and the amortization, rather than expensing, of construction period interest and property taxes. The decline in the cost of owner-occupied housing relative to rental housing is estimated to have sharply increased homeownership. In the absence of this decline 4.5 to 5 million fewer households would have been homeowners at the end of 1978. That is, the homeownership rate would have been 60 percent, rather than 65 percent.
This article examines the incidence of the largest housing-related subsidy in the federal budget, the home mortgage interest deduction (MID). The author uses the difference in interest rates for loans made around the MID limit to identify the incidence of the subsidy. Using data on individual mortgages originated in 2004, the author estimates that for every $1,000 borrowed without the MID, the interest rate on the entire loan decreases by between 3.3 and 4.4 percent. Results suggest that lenders capture between 9 and 17 percent of the subsidy created by the home MID through higher mortgage interest rates.
This paper compares a number of housing policies such as housing taxation, land use and rental regulations and social housing policies for OECD countries relying on new data. Based on a range of econometric analyses, it also investigates whether these housing-related policies achieve their objectives in an efficient and equitable way and whether there are any side effects on other aspects of housing markets or on the wider economy. One main finding is that badly-designed policies can have substantial negative effects on the economy, for instance by increasing the level and volatility of real house prices and preventing people from moving easily to follow employment opportunities. The paper makes some recommendations for the design of efficient and equitable housing policies that can improve the functioning of housing markets and contribute to macroeconomic stability and growth.Les marchés du logement et les politiques structurelles dans les pays de l'OCDECet article compare un certain nombre de politiques du logement tels que la fiscalite du logement, les regles d.urbanisme et les reglementations du marche locatif, ou de politiques de logement social pour les pays de l'OCDE en s'appuyant sur des donnees comparatives. Il examine egalement si ces politiques liees au logement attendent leurs objectifs de maniere efficace et equitable et s'il y a des effets secondaires de ces politiques sur d'autres aspects des marches du logement ou sur l'economie en general. Une conclusion principale est que les politiques mal concues peuvent avoir des effets negatifs importantes sur l'economie, par exemple en augmentant le niveau et la volatilite des prix reels des logements et en empechant les gens de se deplacer facilement pour acceder a l'emploi. Le document formule quelques recommandations pour la conception des politiques du logement efficaces et equitables qui peuvent ameliorer le fonctionnement des marches du logement et de contribuer a la stabilite macroeconomique et la croissance.
This article considers arguments for and against the major tax concessions for owner‐occupied housing in the Internal Revenue Code—concessions that have a significant effect on the federal budget. It recommends retaining two of the concessions— nontaxation of net imputed income and exemption of capital gains—and abolishing two others—the mortgage interest and real estate tax deductions.After a review of the market impact of removing each deduction, the article concludes that an appropriate phase‐out period of 15 to 20 years would virtually eliminate adverse effects on house prices and homeowners.
The value of federal income tax deductions, such as the home mortgage interest deduction (MID), varies across geographic regions. This study uses 1995 tax data to investigate the extent to which the current mortgage deduction is used and how the utilization differs across regions. The authors show that substantial regional differences in using the MID are related to differences in income, the level of house prices, the rate and form of state and local taxation, and demographic differences that affect homeownership and the amount of mortgage debt. About 40% of the explained regional variation in itemization is due to regional differences in house prices; another 20% is due to differences in state and local income and property taxes. About two thirds of the explained regional variation in the average size of the MID is due to regional differences in housing prices and state and local income and property taxes.
The US President's Advisory Panel on Federal Tax Reform has recommended changes to income tax concessions for homeowners. Consistent with the opinions of many economists, the tax reform panel concluded that the existing tax concessions are not particularly effective. The housing and mortgage industry have opposed the reforms, in part due to a fear that the reforms will reduce the homeownership rate. In this paper, 1998 American Housing Survey data are used to estimate a tenure choice equation and to simulate hypothetical changes in tax concessions. Focusing on young households who are likely to be on the margin between renting and owning, it is concluded that the mortgage interest and property tax deductions reduce the homeownership rate for these households due to effects on house prices. The tax credit proposed by the Advisory Panel would be likely to have a similar effect.
F OR many years the mortgage interest the mortgage interest deduction as a sub- deduction was a sacrosanctpart of the sidy to homeownership, and that the true tax codedespite the frequently expressed advantage to owner-occupied housing lies opinion of many economists that it mis- in the different treatment of rental in- allocatedresources in favor of housing and come to landlords (taxed) versus services was regressive besides. The inflation of of owner-occupied housing to homeown- the late 1970sdrove the revenue lossfrom ers (untaxed). We devote s6me attention the deduction relentlessly upward, mak- to the relationship between inflation and ing it an increasingly visible target for tax the cost of owning and renting. We show refonners, and finally the Tax Reform Act that under current tax law, inflation raises of 1986 imposed the first limitations. the cost of renting relative to owning for TRA86 restricted the deductibility of in- peoplein high tax brackets, but lowers the terest to mortgage interest, including in- cost of renting relative to owninglor peo- terest on secondmortgages taken out for ple in the lowest brackets. Whether the "worthy" purposes such as home improve- cost of renting rises absolutely with in- ments, medical expenses and education. flation depends on whether nominal in- Then the 1987 Budget Reconciliation im- terest rates adjust only for expected in- posed a maximum of l flation or adjust sufficiently to keep the million of original mortgage debt plus after-tax real rate constant for those in $100,000additional home equity debt-as the highest brackets. the total amount of mortgage debt on The rent/own cost differential under
This article explores the potential effects of eliminating the home mortgage interest deduction. Estimates of the tax expenditures generated by the home mortgage deduction usually exceed 10 billion in additional tax revenue is generated by eliminating the mortgage interest deduction when such portfolio reshuffling is taken into account. Those hardest hit would be younger, upper-middle-income households. Wealthy households, low-income households, and many elderly households would be less affected.
A considerable housing boom has been a key feature of persistently large saving-investment imbalances in New Zealand over the past decade. Wealth is concentrated to a greater extent in property compared to most other OECD countries, leaving households and the banking system heavily exposed to a correction in land and housing markets. Supply rigidities and tax incentives that bias savings decisions towards property investment have amplified the increase in house prices, widening wealth inequalities in the form of larger homes for those who can afford them, but deteriorating affordability for the rest of the population. Substantial distortions via tax planning have been evident in rental property markets. Although the 2010-11 budget introduced measures to reduce some of these distortions, further reforms are needed to remove the significant tax bias favouring housing. The economic downturn has increased financial pressures on the social housing sector, with a shortage of public dwellings in areas of high demand. Regional supply constraints reflect inefficient land-use policies and long delays arising from an overly complex urban planning system. The adoption of spatial planning frameworks is a positive step forward, but they should include pricing mechanisms for land and road use that are aligned with broader policy objectives. This Working Paper relates to the 2011 OECD Economic Review of New Zealand (www.oecd.org/eco/surveys/NewZealand).Mesures pour rééquilibrer les marchés du logement en Nouvelle-ZélandeAu cours des dix dernières années, le boum spectaculaire du marché du logement a été l’une des principales caractéristiques des déséquilibres importants et persistants entre l’épargne et l’investissement en Nouvelle-Zélande. La richesse est beaucoup plus concentrée dans l’immobilier que dans la plupart des autres pays de l’OCDE, ce qui expose massivement les ménages et le système bancaire à un risque de correction du marché foncier et du marché du logement. Les rigidités du côté de l’offre et les mesures d’incitation fiscale qui influencent les décisions d’épargne au profit des investissements immobiliers ont amplifié la hausse des prix des logements, creusant les inégalités de richesse qui se matérialisent par des logements plus vastes pour ceux qui peuvent se les payer alors que l’accessibilité financière au logement se détériore pour le reste de la population. Des distorsions substantielles imputables à la fiscalité sont devenues visibles sur les marchés de l’immobilier locatif. Bien que le budget 2010-11 ait introduit des mesures pour réduire certaines de ces distorsions, de nouvelles réformes sont nécessaires pour supprimer les biais fiscaux significatifs qui favorisent le logement. Le ralentissement économique a accru les pressions financières sur le secteur du logement social, entraînant une pénurie de logements publics dans des zones où la demande est forte. Le caractère limité de l’offre régionale reflète des politiques d’aménagement du territoire inefficientes et des retards importants imputables à un système de planification urbaine exagérément complexe. L’adoption de cadres d’aménagement du territoire constitue un pas en avant positif, mais cet encadrement devrait inclure des mécanismes tarifaires pour l’aménagement du territoire et des infrastructures routières alignés sur des objectifs politiques plus larges. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de la Nouvelle-Zélande 2011 (www.oecd.org/eco/etudes/Nouvelle-Zélande).
The UK provides an important case study of both the potential for restructuring traditional housing finance systems and the outcome of such restructuring. During the period 1975–2000 the UK government undertook a piece-by-piece restructuring of housing finance. The major objectives of this restructuring included bringing public expenditure under control, ensuring that a high proportion of housing costs were paid by the direct beneficiaries and targeting available subsidy more directly on those in housing need. This agenda was supported by more general policies of liberalisation and privatisation, and particularly by the growth in asset values during the 1970s and 1980s and by macro-economic stabilisation during the 1990s. Based on the desktop analysis undertaken for the Evaluation of English Housing Policy Review this paper takes four specific policies and clarifies how political priorities and the economic environment came together to make policy change possible. It then evaluates the outcomes of these policies both in terms of their immediate goals and the more general objectives of housing policy. The incremental approach favoured by the government appears to have been successful in its own terms, but the result is far from a coherent and sustainable housing finance policy. The conclusions stress more general lessons some of which have implications for effective restructuring in other countries.
This article uses a model that includes an explicit measure of net implicit rental income to examine the size and distribution of the tax expenditure to owner‐occupied housing across and within homeowner income classes. The model is derived from 1989 American Housing Survey data. The analysis leads to three major conclusions.First, on net, the inclusion of net implicit income in the measure of homeowner tax savings adds a substantial amount to the estimated tax expenditure given to owner‐occupied housing. Second, the interaction of changes in the standard deduction and in the tax treatment of itemized nonhousing expenses has rendered the mortgage interest deduction worthless for many low‐ and moderate‐income households. Third, although most of the expenditure is distributed to high‐income households, the distributional effects of eliminating the expenditure to owner‐occupied housing depend on the manner in which these savings are distributed.
A comparison of the workings of the homeowner deduction provisions in the federal income tax, an indirect housing subsidy program, with the more direct housing programs administered by HUD (Department of Housing and Urban Development) demonstrated that the latter generally bare badly by contrast. The homeowner indirect subsidies are an example of an "accidental" social program of considerable impact, complexity, and effectiveness, with Absolute Ignorance as its creator. It certainly bears study and examination by policy artisans, even if it doesn't warrant emulation. (EH)
In contrast to many other countries, Switzerland generally has not seen soaring house prices in the 2000s and house prices have only recently started to diminish slightly. Also, Swiss authorities do not engage in trying to increase the homeownership rate much above its current level. In this paper, we present the main aspects of housing policy and finance in Switzerland which can help to explain these idiosyncrasies. We also analyze house prices and rents. The policies which are discussed in this paper may be useful to housing policy makers in other countries.
Owning one’s home is widely viewed as an integral part of the American dream. Americans are taught from an early age to aspire to homeownership, and several long-standing federal institutions and regulations support owner-occupied residential housing.The income tax deduction for mortgage interest payments is possibly the best-known federal housing policy and is deeply ingrained in the economic and social fabric of the country. Evidence suggests, however, that the mortgage interest deduction (MID) does little if anything to encourage homeownership. Instead, it serves mainly to raise the price of housing and land and to encouragepeople who do buy homes to borrow more and to buy larger homes than they otherwise would. Most tax return filers, especially those with low or moderate incomes, do not itemize their deductions and therefore are not in a position to take advantage of the deduction if they were to buy a home. As a result, the deduction not only drains significant revenues from the Treasury every year, it also provides much larger benefits to high-income households than to low- or moderate-income households, and has at best a small effect on homeownership.In light of those concerns, the President’s Advisory Panel on Federal Tax Reform (2005) suggested major changes to the once politically sacrosanct MID. The panel proposed changing the deduction to a 15 percent credit and making it available to all filers, regardless of itemization status. Those proposals would partially address some of the problems noted above.While we believe the panel’s proposals regarding the MID would be a step in the right direction, we advocate bolder changes in federal housing policy. We propose a tax credit and a subsidized saving vehicle for first-time home buyers, financed by the elimination of the MID. Relative to current policy or to the panel’s recommendations, our proposals would be less expensive, more progressive, and more effective in encouraging homeownership.The report is organized as follows. Parts II and III provide background information on U.S. homeownership rates and federal housing policies, respectively. Part IV discusses the underlying justification for encouraging homeownership through public policy. Part V discusses the economic effects of the MID. Parts VI and VII describe our two proposed alternative policies and describe their potential effects. Part VIII is a short conclusion.
With an annual growth rate of 0.62 per cent since 1980, Taiwan's homeownership rate reached 88 per cent in 2007. This study explores possible causes of Taiwan's high homeownership rates. The institutional and economic context for tenure choice in Taiwan is reviewed, paying particular attention to the taxation and financing of owner-occupied housing, house prices relative to rents, housing subsidies and housing demand. A model of tenure choice is estimated and then used to simulate policy and other changes. It is concluded that Taiwan's high rate of homeownership is due primarily to the low user cost of owner-occupied housing, which is due in part to house price inflation. Government mortgage subsidy policies designed to support ownership appear to have little effect.
The relative cost of owning and renting housing and housing affordability have been clearly established as important determinants of home ownership. But the roles of marital status and history have been largely ignored. In this paper we show that both current marital status and past history affect ownership. Past history matters because wealth accumulation is greater among couple households than singles owing largely to economies of scale in housing consumption. Moreover, wealth is lost upon divorce. In effect, past marital history affects the affordability of owner housing. This result is shown in the estimation of model explaining wealth, leverage and tenure choice using Australian datasets.
In this paper we examine whether homeowning benefits children by testing whether children of homeowners stay in school longer than children of renters and whether daughters of homeowners are less likely to have children as teenagers than daughters of renters. We use both probit models and a bivariate probit technique which takes account of possible selection bias due to differences between parents who choose to own versus rent. We find in several data sets that both effects are statistically significant and quantitatively important—particularly for low-income households. We also estimate that the dollar benefit per low- income household of parents being homeowners rather than renters is at least $31,000.
Recent U.S. government proposals intend to increase the homeownership rate by roughly 2.5 percentage points, to 67.5%, by the year 2000. The possible use of the U.S. income tax code is virtually ignored in these proposals. Using a user-cost framework incorporated into a tenure choice equation and both macro- and micro-level analyses, we demonstrate that the revenue-neutral replacement of the current deductibility of home mortgage interest and property taxes with a tax credit of the appropriate level alone can increase aggregate homeownership rates in the range of 3 to 5%. Moreover, these increases are even higher in lower-income neighborhoods, suggesting that such a policy could address the supplementary community development purpose of neighborhood stabilization.
This paper examines the effects of the current income tax treatment of owner-occupied housing on the quantity of housing consumed and on the tenure choice by various groups. Cross-sectional data for 1970 are used to estimate jointly tenure choice and housing demand equations. The equations' parameters are used to assess the efficiency and equity implications of the relevant tax law provisions.
Most countries have tax provisions and subsidies to promote homeownership. These provisions generate an asymmetry in the tax treatment of owner- and rental-occupied housing, which affects the incentives to supply tenant-occupied housing. This paper analyzes the quantitative importance of the interaction of these provisions with the progressivity of income taxation in the context of an overlapping generations model with housing and rental markets. The model replicates the key facts observed in the economy, as well as distributional patterns of ownership, house size, and landlord behavior. The model suggests that the progressivity of income taxation can amplify or mitigate the effects of the asymmetries with important implications for housing tenure, housing consumption, portfolio reallocations, and welfare that differ from those reported in the literature.
First, we survey recent research in the application of optimal tax theory to housing. This work suggests that the under-taxation of housing for owner occupation distorts investment so that owner occupiers are encouraged to over-invest in housing. Simulations of the US economy suggest that this is true there. But, the theoretical work excludes consideration of land and the simulations exclude consideration of taxes other than income taxes. These exclusions are important for the US and UK economies. In the US, the property tax is relatively high. We argue that excluding the property tax is wrong, so that, when the property tax is taken into account, owner occupied housing is not undertaxed in the US. In the UK, property taxes are relatively low but the cost of land has been increasing in real terms for forty years as a result of a policy of constraining land for development. The price of land for housing is now higher than elsewhere. Effectively, an implicit tax is paid by first time buyers which has reduced housing investment. When land is taken into account over-investment in housing is not encouraged in the UK either.
Thesis (Ph. D.)--University of Chicago, Dept. of Economics, 1964.
This paper exploits the panel structure of the ECHP micro data and uses fixed effects-specifications to identify the main determinants of equilibrium housing tenure outcomes across Europe between 1994 and 2001. The accommodation type which affects both the relative supply of and demand for owner-occupied housing has the strongest impact. Holding occupant and location characteristics (including preferences for homeownership) constant, a flat in a small apartment building has a roughly 40 percentage points lower probability of being owner-occupied than a detached house. Among the occupants characteristics, only age has a quantitatively meaningful positive impact. At the regional level, the housing stock composition and the share of public rental housing are the main identifiable determinants of the vast homeownership rate differentials. Tax policy reforms have only had relatively minor effects on homeownership attainment and, counter to widespread perception; spatial differences in intergenerational cohesion do not explain homeownership rate differentials.
This paper analyzes U.S. time-series data in order to study the determinants of the choice between renting and homeownership. Special attention is focused upon changes in the relative prices of owning and renting induced by provisions of the federal personal income tax. The results suggest that about one-quarter of the growth in the proportion of homeowners in the post-World War II period is a consequence of the tax system's favorable treatment of owner-occupied housing.
The authors describe a model in which rental and owner housing are risky assets, tenure choice is endogenous, and each household is constrained to consume the same amount of owner housing that it has in its investment portfolio. Equilibrium net rates of return are major determinants of the amount of owner housing, but a logit model indicates that demographic factors are the main determinants of ownership rates. In their simulation, taxes on owner housing would raise welfare not only by reallocating capital but also by the government's taking part of the risk from individual properties and diversifying it away. Copyright 1992 by University of Chicago Press.
Modern empirical work on the choice between renting and owning focuses on the concept of the "user cost" of housing, which integrates into a single measure the various components of housing costs. The standard approach implicitly assumes that households know the user cost of housing with certainty. However, the ex post user cost measure exhibits substantial variability over time, and it is highly unlikely that individuals believe themselves able to forecast these fluctuations with certainty. In this paper, we construct and estimate a model of the tenure choice that explicitly allows for the effects of uncertainty. The results suggest that previous work which ignored uncertainty may have overstated the effects of the income tax system upon the tenure choice.
This paper utilizes microdata to directly quantify the impact of mortgage underwriting criteria on individual homeownership propensities. To determine whether a family is constrained by these criteria, the optimal home purchase price is estimated. The results indicate that wealth and income constraints both reduce homeownership propensities, with a stronger impact for wealth constraints. Mortgage market innovations of the early 1980s seem to have reduced these effects. The research indicates, however, that even in well-developed capital markets, the presence of borrowing constraints adversely affects homeownership propensities. Copyright American Real Estate and Urban Economics Association.
Owner-occupied housing is said to be favored in the tax code because the return on owner's equity is not taxed and mortgage interest and property taxes can be deducted in the computation of one's income tax base. The special tax treatment reduces the user cost of capital for owner-occupied housing.
The issue treated in this paper is the measurement of the tax rate to be employed in the user cost calculations. It is argued that different tax rates are appropriate for the tenure choice and quantity-demanded decisions, and that these values depend on the detailed tax position of the household and the method of finance. Average 1977 tax rates for household in different income ranges are calculated using the NBER TAXSIM microeconomic data file on individual tax returns.
Given falling birth rates, ageing baby boomers approaching retirement age as well as a pension crisis in most advanced economies, understanding the characteristics of the labour supply function of the elderly have taken on a new significance. Even in developing countries, with labour surplus economies, this is a major issue as these poor countries try to build a pension scheme with at least a minimum amount of state provision for the elderly. What motivates retired people to enter or continue in the labour force is the focus of our analysis. We use panel data from Korea which is an interesting country since it transited from developing to developed economy status within the last few decades and therefore exhibits characteristics of both underdevelopment and economic advancement. The econometric methods include probit models of: pooled data; panel data with random effects; and 2SCML, to allow for possible endogeneity bias induced by the self-declared health status of the elderly. We stress the crucial importance of pecuniary and non-pecuniary factors in determining labour supply of the elderly. Contrary to expectations, non-pecuniary factors such as health status are crucial in the decision-making process of whether to work or not to work for the elderly.
Economic theory suggests that an increase in the expected length of stay in a dwelling increases the probability of a household choosing to own a house rather than rent. This hypothesis is derived from recognition that there are substantial transaction costs associated with homeownership and increased expected time in the home reduces the annualized transaction cost. Using a military data set, we confirm that expected length of stay in a dwelling and the transaction costs of selling are very important to the ownership decision. Our best estimate of the transaction costs of selling a home are the sum of 3% of house value and 4% of household earnings.
Purchase of a house requires three interrelated household financial decisions: what level of debt to obtain, whether to select an adjustable or fixed rate mortgage (ARM or FRM), and whether to choose an FHA or a conventional loan. While some have analyzed the mortgage debt decision and the ARM/FRM choice, virtually no one has studied the FHA/conventional mortgage choice or the interrelation among the mortgage debt and instrument decisions. In our sample of 819 young home purchasers, debt and mortgage choice is driven by a need to finesse the downpayment and monthly payment constraint ratios and to lower mortgage insurance costs.
The impact of consumption-based, fundamental Federal tax reform on the housing market has been a controversial and difficult topic. We employ a dynamic, numerical simulation model of the aggregate housing market to augment our understanding of the key forces at work in the short-run and over longer periods. This approach suggests that integrating the short-run and long-term impacts of tax reform leads to the possibility that there will be relatively modest impacts on the nominal values of existing housing. The results indicate that an important topic for future research is the elasticity of housing supply in the short run and long run.
This article compares the homeownership rates of young households in Australia and the United States and evaluates the impacts of the two countries' different approaches to subsidizing homeownership. Since about 1950, Australia's rate of homeownership has consistently been higher than that of the United States. The homeownership rate for young adults is also significantly higher in Australia. While the United States allows mortgage interest and property taxes to be deducted from income for tax purposes, Australia has provided cash subsidies for down payments and mortgage payments. We conclude that differences in housing costs and household characteristics do not explain differences in ownership rates. We also conclude that differences in subsidy policies have only a minor impact on ownership rates. Copyright 2006 American Real Estate and Urban Economics Association
We estimate how tax subsidies to owner-occupied housing are distributed spatially across the United States and find striking skewness. At the state level, the mean tax benefit per owned unit in 1990 ranged from 10,718 in Hawaii. The dispersion is slightly greater when benefit flows are measured at the metropolitan-area level. Even assuming the subsidies are funded in an income progressivity-neutral manner, a relatively few metro areas, primarily in California and the New York-Boston corridor, are shown to gain considerably while the vast majority of areas have relatively small gains or losses. Copyright 2003 by the American Real Estate and Urban Economics Association
This study extends economic models of the joint decisions of living arrangement and home ownership. The cost of shelter is an important factor in determining whether youth live independently (apart from parents and other non-related adults), and the cost of home ownership relative to renting is important to the tenure decision (choice of owning or renting). Simulations suggest that the post-1985 decline and eventual removal of the Australian subsidy for first-time home owners has lowered the home ownership rate among young households by 23 per cent, the equivalent of slowing the time to first ownership by two years.