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Do Mortgage Subsidies Help or Hurt Borrowers?

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Abstract

Mortgage subsidies affect homeownership costs by reducing effective mortgage rates and increasing house prices. I show analytically the role of mortgage subsidies in determining house price changes, economic incidence, and efficiency costs using a theoretical framework for applied welfare analysis. I derive simple expressions for these effects, as functions of reduced-form sufficient statistics, which I use to measure the effects from eliminating mortgage deductions. My main results characterize the distributional impact of mortgage subsidies among buyers and owners and how house price responses attenuate efficiency losses. My results provide broader methodological insights into the welfare analysis of credit policies.

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  • David E. Rappoport, 2016. "Do Mortgage Subsidies Help or Hurt Borrowers?," Finance and Economics Discussion Series 2016-081, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2016-81
    DOI: 10.17016/FEDS.2016.081
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    Cited by:

    1. Kunovac, Davor & Zilic, Ivan, 2022. "The effect of housing loan subsidies on affordability: Evidence from Croatia," Journal of Housing Economics, Elsevier, vol. 55(C).

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    More about this item

    Keywords

    Public economics; Mortgage subsidies; Incidence; Optimal taxation; House prices; mortgage interest deductions; MID;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy

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