Subsidizing housing with deductions

Abstract

Many governments subsidize owner-occupied housing by allowing households to deduct housing expenses from their taxable incomes. While these deductions provide considerable financial benefits to homeowners, they also have significant downstream consequences. This article synthesizes a large body of literature that assesses these implications on various aspects of the housing market, including mortgage demand, interest rates, tenure decisions, homeownership rates, housing prices, and welfare. The findings in the literature collectively emphasize the distortive impact of these fiscal deductions on housing consumption and investment, with a growing consensus regarding the deductions' regressivity and negative effects on homeownership rates and welfare.