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The Sensitivity of Homeowner Leverage to the Deductibility of Home Mortgage Interest

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  • 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.

Suggested Citation

  • Patric H. Hendershott & Gwilym Pryce, 2005. "The Sensitivity of Homeowner Leverage to the Deductibility of Home Mortgage Interest," NBER Working Papers 11489, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:11489
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    Cited by:

    1. Jan Rouwendal, 2009. "Housing Wealth and Household Portfolios in an Ageing Society," De Economist, Springer, vol. 157(1), pages 1-48, March.
    2. Mark Andrew, 2012. "The Changing Route to Owner-occupation: The Impact of Borrowing Constraints on Young Adult Homeownership Transitions in Britain in the 1990s," Urban Studies, Urban Studies Journal Limited, vol. 49(8), pages 1659-1678, June.
    3. Gwilym Pryce, 2011. "Bidding Conventions and the Degree of Overpricing in the Market for Houses," Urban Studies, Urban Studies Journal Limited, vol. 48(4), pages 765-791, March.
    4. Cole, Adam J. & Gee, Geoffrey & Turner, Nicholas, 2011. "The Distributional and Revenue Consequences of Reforming the Mortgage Interest Deduction," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(4), pages 977-1000, December.
    5. Tuomas Takalo, 2019. "Regulation of short-term consumer credits," Journal of Banking Regulation, Palgrave Macmillan, vol. 20(4), pages 348-354, December.
    6. Allan Crawford, 2015. "Building Stable Mortgage Markets: Lessons from Canada's Experience," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 81-86, March.
    7. Brent W. Ambrose & Patric H. Hendershott & David C. Ling & Gary A. McGill, 2022. "Homeownership and taxes: How the TCJA altered the tax code's treatment of housing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(5), pages 1167-1200, September.
    8. Baiyi Wu & Wenlong Bian & Ying Xue & Hao Zhang, 2021. "Confucian Culture and Homeownership: Evidence from Chinese Families," Journal of Family and Economic Issues, Springer, vol. 42(1), pages 182-202, March.
    9. Annelies Hoebeeck & Koen Inghelbrecht, 2017. "The impact of the mortgage interest and capital deduction scheme on the Belgian mortgage market," Working Paper Research 327, National Bank of Belgium.
    10. Martin, Hal & Hanson, Andrew, 2016. "Metropolitan area home prices and the mortgage interest deduction: Estimates and simulations from policy change," Regional Science and Urban Economics, Elsevier, vol. 59(C), pages 12-23.
    11. Hendershott, Patric H. & Ong, Rachel & Wood, Gavin A. & Flatau, Paul, 2009. "Marital history and home ownership: Evidence from Australia," Journal of Housing Economics, Elsevier, vol. 18(1), pages 13-24, March.
    12. Josep Raya & Jaume Garcia, 2012. "Which Are the Real Determinants of Tenure? A Comparative Analysis of Different Models of the Tenure Choice of a House," Urban Studies, Urban Studies Journal Limited, vol. 49(16), pages 3645-3662, December.
    13. Hanson, Andrew, 2020. "Taxes and Borrower Behavior: Evidence from the Mortgage Interest Deductibility Limit," Journal of Urban Economics, Elsevier, vol. 118(C).
    14. Cenkhan Sahin, 2016. "Macroeconomic effects of mortgage interest deduction," DNB Working Papers 514, Netherlands Central Bank, Research Department.
    15. Andrew Hanson & Hal Martin, 2014. "Housing Market Distortions and the Mortgage Interest Deduction," Public Finance Review, , vol. 42(5), pages 582-607, September.
    16. Giorgio Bellettini & Filippo Taddei, 2009. "Real Estate Prices and the Importance of Bequest Taxation," CESifo Working Paper Series 2577, CESifo.
    17. Bellettini Giorgio & Taddei Filippo & Zanella Giulio, 2013. "Bequest taxes, donations, and house prices," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 355-379, October.
    18. Damen, Sven & Vastmans, Frank & Buyst, Erik, 2016. "The effect of mortgage interest deduction and mortgage characteristics on house prices," Journal of Housing Economics, Elsevier, vol. 34(C), pages 15-29.

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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