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The sensitivity of homeowner leverage to the deductibility of home mortgage interest

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  • Hendershott, Patric H.
  • Pryce, Gwilym

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 60 (2006)
Issue (Month): 1 (July)
Pages: 50-68

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Handle: RePEc:eee:juecon:v:60:y:2006:i:1:p:50-68

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Web page: http://www.elsevier.com/locate/inca/622905

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References

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  1. Bester, Helmut, 1987. "The role of collateral in credit markets with imperfect information," European Economic Review, Elsevier, Elsevier, vol. 31(4), pages 887-899, June.
  2. Leslie E. Papke & Jeffrey M. Wooldridge, 1993. "Econometric Methods for Fractional Response Variables with an Application to 401(k) Plan Participation Rates," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0147, National Bureau of Economic Research, Inc.
  3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  4. Amemiya, Takeshi, 1973. "Regression Analysis when the Dependent Variable is Truncated Normal," Econometrica, Econometric Society, Econometric Society, vol. 41(6), pages 997-1016, November.
  5. Patric H. Hendershott & Joel Slemrod, 1982. "Taxes and the User Cost of Capital for Owner-Occupied Housing," NBER Working Papers 0929, National Bureau of Economic Research, Inc.
  6. Woodward, Susan E. & Weicher, John, 1989. "Goring the Wrong Ox: A Defense of the Mortgage Interest Deduction," National Tax Journal, National Tax Association, National Tax Association, vol. 42(3), pages 301-13, September.
  7. Hendershott, Patric H. & LaFayette, William C. & Haurin, Donald R., 1997. "Debt Usage and Mortgage Choice: The FHA-Conventional Decision," Journal of Urban Economics, Elsevier, Elsevier, vol. 41(2), pages 202-217, March.
  8. Brueckner, Jan K, 1997. "Consumption and Investment Motives and the Portfolio Choices of Homeowners," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 15(2), pages 159-80, October.
  9. Robert M. Dunsky & James R. Follain, 2000. "Tax-Induced Portfolio Reshuffling: The Case of the Mortgage Interest Deduction," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 28(4), pages 683-718.
  10. Follain, James R. & Ling, David C., 1991. "The Federal Tax Subsidy to Housing and the Reduced Value of the Mortgage Interest Deduction," National Tax Journal, National Tax Association, National Tax Association, vol. 44(2), pages 147-68, June.
  11. Brueckner, Jan K., 1994. "The Demand for Mortgage Debt: Some Basic Results," Journal of Housing Economics, Elsevier, Elsevier, vol. 3(4), pages 251-262, December.
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Cited by:
  1. Giorgio Bellettini & Filippo Taddei, 2009. "Real Estate Prices and the Importance of Bequest Taxation," Carlo Alberto Notebooks, Collegio Carlo Alberto 107, Collegio Carlo Alberto, revised 2011.
  2. 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 Association, vol. 64(4), pages 977-1000, December.
  3. Jan Rouwendal, 2009. "Housing Wealth and Household Portfolios in an Ageing Society," De Economist, Springer, Springer, vol. 157(1), pages 1-48, March.

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