The Housing Ladder, Taxation, and Borrowing constraints
Using a multi-tier model of the housing market, we show that both starters and movers benefit from mortgage interest deduction for higher income groups. However, such tax favouring also tends to facilitate house price explosions, especially when interest rates are low and LTV-ratios are high. More in general, the efficiency of implicit tax subsidies to homeowners depends critically on the price responsiveness of new construction, which is found to differ strongly from country to country. Irrespective of supply conditions, lending institutions are likely to lose by policies aimed at limiting the deductibility of mortgage interest payments. JEL Classification: G12; G21; H20; R31
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