Working Paper: NBER ID: w11489
Authors: Patric H. Hendershott; Gwilym Pryce
Abstract: Mortgage interest tax deductibility is needed to treat debt and equity financing of homes equally. Countries that limit deductibility create a debt tax penalty that presumably leads households to shift from debt toward equity financing. The greater the shift, the less is the tax revenue raised by the limitation and smaller is its negative impact on housing demand. Measuring the financing response to a legislative change is complicated by the fact that lenders restrict mortgage debt to the value of the house (or slightly less) being financed. Taking this restriction into account reduces the estimated financing response by 20 percent (a 32 percent decline in debt vs a 40 percent decline). The estimation is based on 86,000 newly originated UK loans from the late 1990s.
Keywords: No keywords provided
JEL Codes: H2; H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax penalty associated with mortgage interest deductibility (G21) | average loan-to-value ratio (LTV) (G21) |
| removal or limitation of mortgage interest deductibility (G21) | significant reduction in homeowner leverage (G51) |
| tax penalty (H26) | homeowner leverage decisions (G51) |
| previous ownership status (R21) | sensitivity to changes in deductibility (H31) |
| age of the borrower (G51) | sensitivity to changes in deductibility (H31) |