Housing market responses to the mortgage interest deduction

Abstract

This paper examines the impact of tax subsidies for homeowners on the housing market. In 2015, the Belgian regions became responsible for the tax subsidy after having been under federal control. The average present value of the subsidies de- creased significantly more in Flanders than in Wallonia. We exploit this variation in a difference-in-differences design to estimate the effect of its repeal on equilibrium prices and quantities. There are two important results. Changes in the subsidies largely capitalize in the price of housing and land, while their quantities remain un- affected. These results indicate that the subsidies are largely captured by current property owners and can be gradually reduced without disrupting the market.

Keywords: mortgage interest deduction, house prices, land prices, capitalization, economic incidence

JEL Classification: R21, R31, H24