Using a major reform that scaled back the mortgage interest deduction for middle- and high-income households in Denmark, we study how tax subsidies affect housing decisions. We present four main findings. First, the mortgage deduction has a precisely estimated zero effect on homeownership for high- and middle-income households. Second, the mortgage deduction has a clear effect on housing demand at the intensive margin, inducing homeowners to buy larger and more expensive houses. Third, the deduction has sizeable effects on household financial decisions, inducing them to increase indebtedness. Finally, the reduction of the tax subsidy lowered equilibrium house prices.
Gruber, Jonathan, Amalie Jensen, and Henrik Kleven.
"Do People Respond to the Mortgage Interest Deduction? Quasi-experimental Evidence from Denmark."
American Economic Journal: Economic Policy,
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Household Finance: Household Saving, Borrowing, Debt, and Wealth
Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand
Housing Supply and Markets