Imputed Rent and Distributional Effects of Housing-Related Policies in Estonia, Italy and the United Kingdom

By Maestri, Virginia | Baltic Journal of Economics, Autumn 2013 | Go to article overview

Imputed Rent and Distributional Effects of Housing-Related Policies in Estonia, Italy and the United Kingdom


Maestri, Virginia, Baltic Journal of Economics


Abstract

Housing policies are a complex set of taxes, benefits and incentives. This paper evaluates the redistributive effect of a comprehensive set of housing-related policies, taking into account the housing advantage of homeowners and social tenants. We use the Euromod microsimulation model to simulate housing policies in Estonia, Italy and the United Kingdom. Disentangling the contribution to inequality and poverty of each housing-related policy, we find that the current design of property taxes is not progressive and that other housing policies have a limited impact on inequality in Estonia and on both inequality and relative poverty in Italy. Only in the UK are housing policies more important than imputed rent in reducing inequality and poverty. In all three countries, housing-related policies favor the elderly. Although the United Kingdom has the most effective system of housing policies, Estonia seems to have the most efficient one.

Keywords: Housing policies; Imputed rent; Inequality; Microsimulation; Property tax

JEL: H23; H53; I38

(ProQuest: ... denotes formulae omitted.)

1. Introduction and motivation

Housing represents a considerable part of household wealth and spending. In recent decades there has been a surge in house prices and a parallel increase in the share of household spending on housing in most OECD countries. The increase in house prices was driven not only by economic and demographic factors (declining interest rates, positive net migration, changes in household structure), but also by public intervention. Financial deregulation, mortgage innovation and favourable tax treatment of homeownership have all contributed to this trend. The contemporaneous increase in the rate of homeownership is only partially explained by population aging and is potentially an outcome of this policy set-up (Andrews et al., 2011).

In the same period most OECD countries made large use of mortgage interest tax deductions. This policy represents a subsidy to home-ownership. The most widely used argument in support of mortgage interest deductions is that boosting homeownership strengthens the stake that people have in society (Glaeser and Shapiro 2003). Nonetheless, the effect of mortgage interest tax deductions on the probability of homeownership is questionable, suggesting that the impact is rather on the quantity of housing consumption (Glaeser and Shapiro, 2003). In more tightly regulated housing markets mortgage interest deduction may even have an adverse impact on the likelihood of homeownership, due to capitalization of the mortgage tax subsidy into house values (Hilber and Turner, 2010). Over-consumption of housing and its effect on house prices translates into a redistribution from new entrants in the housing market to insiders (Andrews et al., 2011). Moreover, mortgage interest tax deductions are regressive (Mastaganis and Flevotomou, 2007). The disequalizing effect and the missed tax revenues of this form of tax relief eventually led some countries to introduce limitations (e.g. Estonia in 2005) and abolition (Germany 1987, France 1997, the UK 2000) (Mastaganis and Flevotomou, 2007).

The behavioural and redistributive effects of this housing-related policy depend on the national extent of mortgage take-up, which in turn depends on some country-specific characteristics such as development of the credit market and household structure. Indeed, both the share of outright homeowners and the share of homeowners with an outstanding mortgage vary widely across countries. The share of outright homeowners is high in Mediterranean and Eastern European countries (above 50%), while the share of homeowners with a mortgage is high in most Nordic and Anglo-Saxon countries (above 30%).'

Similarly, homeownership is boosted by the partial or full exemption of capital gains and imputed rent from taxation. Although homeownership is an important asset among low-income people, a well-designed reform introducing taxation of imputed rent can achieve redistributive goals. …

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