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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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11489.

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Date of creation: Jul 2005
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Publication status: published as Hendershott, Patric H. and Gwilym Pryce. "The Sensitivity Of Homeowner Leverage To The Deductibility Of Home Mortgage Interest," Journal of Urban Economics, 2006, v60(1,Jul), 50-68.
Handle: RePEc:nbr:nberwo:11489

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  1. Woodward, Susan E. & Weicher, John, 1989. "Goring the Wrong Ox: A Defense of the Mortgage Interest Deduction," National Tax Journal, National Tax Association, vol. 42(3), pages 301-13, September.
  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 0147, National Bureau of Economic Research, Inc.
  3. Amemiya, Takeshi, 1973. "Regression Analysis when the Dependent Variable is Truncated Normal," Econometrica, Econometric Society, Econometric Society, vol. 41(6), pages 997-1016, November.
  4. 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.
  5. 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.
  6. Hendershott, Patric H. & LaFayette, William C. & Haurin, Donald R., 1997. "Debt Usage and Mortgage Choice: The FHA-Conventional Decision," Journal of Urban Economics, Elsevier, vol. 41(2), pages 202-217, March.
  7. 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.
  8. 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, vol. 44(2), pages 147-68, June.
  9. 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.
  10. Patric H. Hendershott & Joel Slemrod, 1982. "Taxes and the User Cost of Capital for Owner-Occupied Housing," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 10(4), pages 375-393.
  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," CESifo Working Paper Series 2577, CESifo Group Munich.
  2. Jan Rouwendal, 2009. "Housing Wealth and Household Portfolios in an Ageing Society," De Economist, Springer, Springer, vol. 157(1), pages 1-48, March.
  3. 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, vol. 64(4), pages 977-1000, December.

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