25th February 2021 – from 12:30 until 13:30 (Microsoft Teams) Seminar (CEREC-CAPE) : Housing market responses to the mortgage interest deduction
Sven Damen (University of Antwerp)
25th February 2021 – from 12:30 until 13:30 (Microsoft Teams)
Seminar (CEREC-CAPE) : Housing market responses to the mortgage interest deduction
Governments around the world use tax subsidies to stimulate homeownership. Whether or not these subsidies affect homeownership crucially depends on the degree of capitalization into house prices. We study the effects of a large reduction in the mortgage interest and capital deduction (MICD) in Flanders. In 2015, the Belgian regions became responsible for the MICD after having been under federal control for nearly a decade. What followed was a series of reforms in which Flanders drastically reduced the MICD while Wallonia left the subsidy unaffected for the average home buyer. Exploiting this variation in a difference-in-differences analysis we estimate the impact on prices, sales and construction permits. We find that the changes in the average tax subsidy largely capitalize both in the price of single family housing and the price of land. We find no effect of the reduction in the MICD on sales and building permits for single family housing in line with expectations for an inelastic housing market. Due to the large capitalization in house and land prices, tax subsidies may not be effective in areas with a price-inelastic housing supply.
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