The Sensitivity of Houseowner Leverage to the Deductibility of the Mortgage Interest

Patric Henry Hendershott, G. Pryce

    Research output: Contribution to journalArticle

    25 Citations (Scopus)

    Abstract

    Mortgage interest tax deductibility is needed to treat debt and equity financing of houses symmetrically. 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. (c) 2006 Elsevier Inc. All rights reserved.

    Original languageEnglish
    Pages (from-to)50-68
    Number of pages18
    JournalJournal of Urban Economics
    Volume60
    Issue number1
    DOIs
    Publication statusPublished - Jul 2006

    Keywords

    • mortgage interest deductibility
    • homeowner leverage
    • debt tax penalty
    • fractional logit regression
    • IMPERFECT INFORMATION
    • INTEREST DEDUCTION
    • INVESTMENT
    • VARIABLES
    • MARKETS
    • DEBT

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