What impact does subsidised housing renovations have on the filtering process?

Sweden has introduced a system of subsidising renovations of housing in the property market, which aims to modernise the building stock and improve energy efficiency. This study explores the extent to which the tax deduction for renovations (ROT) has contributed to the reduction of property depreciation and subsequent differences in single-family house prices in Swedish municipalities. The paper also investigates whether house price levels influence the desire to renovate and whether tax deductions incentivise renovation needs. Using unbalanced data from 2004 to 2020 at a municipal level regarding total subsidy amounts and housing prices, we will estimate a panel data model based on a traditional DiPasquale and Wheaton reduced-form model where house prices are dependent variable in one model and renovation amounts are the dependent variable in the other model. Other independent variables that will be used are, among others, income, demographics, and supply of single-family houses. The findings suggest that variations in the amount of tax reduction for renovations and the number of property owners receiving these subsidies in different municipalities have contributed to observable differences in house prices. The study concludes that government housing policies like subsidising renovations may interfere with a well-functioning housing market's expected filtering process. Therefore, it could have implications for policymakers looking to promote more equitable access to housing in Sweden.