Academic journal article Journal of Real Estate Literature

Mortgage Interest Deductions and Homeownership: An International Survey

Academic journal article Journal of Real Estate Literature

Mortgage Interest Deductions and Homeownership: An International Survey

Article excerpt


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.

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A household's decision whether to own or rent its dwelling is influenced by the tax and subsidy policies of the jurisdictions where it resides: national, state or provincial, and local. Similarly, the supply of housing and landlords' choices are affected by such policies. The outcome is that tenure choices depend on a complex set of behavioral responses to tax and subsidy policies.

In this paper we review the modeling and empirical analysis of such policies with special emphasis on the mortgage interest deduction (MID). We take a global perspective because countries have different housing policies. Some countries allow deduction of mortgage interest, while others do not. Moreover, some countries tax the imputed rental income of owner-occupiers but then allow deduction of expenses such as mortgage interest. In the latter case, the tax benefit afforded by the MID is offset by the tax on imputed rent. The United States allows for deduction of mortgage interest from income for tax purposes but does not tax imputed rent. The United Kingdom neither allows for a MID nor taxes imputed rental income. In contrast, Switzerland both taxes imputed rental income and allows for a MID (Bourassa, Hoesli, and Scognamiglio, 2010).

In the next section of this paper we present a general model of tenure choice, establishing a framework to be used to evaluate existing research. Of particular interest is the proper specification of the set of policy variables in the tenure choice equation. One advantage of full specification of the tenure decision equation is that the role of owner-occupied dwelling prices becomes apparent. A recent emphasis of empirical work has been on the capitalization effects of tax policies. We discuss how capitalization can offset the direct effects of housing taxes and subsidies, complicating the empirical analysis.

Our review of empirical studies in the third section focuses on the U.S., which has received the most attention in the literature. A variety of modeling approaches has been used to simulate the hypothetical effects of ending the MID. Most of the studies, and particularly the ones that conform more closely to our preferred model, conclude that there would be negligible impacts on the homeownership rate. We then shift in the fourth section to other, mainly European, countries, several of which have made changes to housing tax policy. The general conclusion from these studies is consistent with that from the U.S. studies. The U.K. is a particularly interesting case, having gradually abolished the MID over several decades. We also review a study that considers the tax treatment of mortgage interest across a number of countries that are members of the Organisation for Economic Co-operation and Development (OECD). The OECD study uses a comprehensive set of determinants to model ownership rates across 15 countries that have different approaches to mortgage interest taxation. …

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