Using a multi-tier model of the housing market, we show that both starters and movers benefit from mortgage interest deduction for higher income groups. However, such tax favouring also tends to facilitate house price explosions, especially when interest rates and downpayment ratios are low. More in general, the efficiency of implicit tax subsidies to homeowners depends critically on the price responsiveness of new construction, which is found to differ strongly from country to country. Irrespective of supply conditions, running down mortgage interest deduction is likely to detract from the profits of lending institutions.

Additional Metadata
Keywords House prices, Housing market, Mortgage lending, Taxation
JEL Asset Pricing (jel G12), Banks; Other Depository Institutions; Mortgages (jel G21), Taxation, Subsidies, and Revenue: General (jel H20), Housing Supply and Markets (jel R31)
Persistent URL hdl.handle.net/1765/808
Citation
Swank, J, Kakes, J, & Tieman, A.F. (2003). The housing ladder, taxation, and borrowing constraints. Retrieved from http://hdl.handle.net/1765/808