Secret #34 - The Mortgage Interest Tax Deduction Increases House Prices which Lowers Home Ownership
Like so many other government home ownership policies, despite the best of intentions, it lowers home ownership.
The tax benefits are capitalized/monetized into higher house prices. That is, the tax benefits turn into higher house prices. That’s the way the “free” market works.
“Research does suggest that the home mortgage interest deduction increases housing costs by increasing demand for housing” Eastman, Tyger, 2019.
“... estimates show that tax relief on mortgage debt financing cost tends to be capitalised into real house prices” Andrews, 2010.
“Yet economic studies consistently show that the mortgage interest deduction fails to advance its fundamental purpose. It does not increase the rate of Homeownership” Morrow, 2012.
“The empirical evidence suggests that, contrary to popular wisdom, the deduction generally does not increase the ownership rate. This result is likely due to the fact that the MID [mortgage interest deduction] is capitalized into house prices” Bourassa, et al., 2015.
“Eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare” Sommer, Sullivan, 2018.
“In fact, it reduced the homeownership rate by about five percentage points. (It raised house prices so much—through the capitalization of tax benefits—that homes became out of reach for some buyers.)” Emmons, 2018.
And most of these studies only looked at the impact of this tax break when applied to live-in home owners, not when it’s applied to landlord-owners. All U.S. landlords qualify for it.
The mortgage interest tax deduction for landlord-owners may have an even bigger impact on lowering the home ownership rate, increasing household debt and decreasing economic growth.
I agree with Nick... if the goal is to increase homeownership rates, it would certainly come from the mid to lower income ranges and therefore on the lower end of the spectrum for home values. At those levels, its rare for someone to itemize. I do however agree with your assessment that the interest deduction helps landlords which does impact housing prices. But landlording IS a business and interest deductions are provided to businesses so its hard to see that deduction eliminated.
My opinion is that in a nation of over 350 million people, 60-65% homeownership rates are perfectly fine. What I would like to see more of is single family 'for rent' developments with long term leases like 10, even 15 years. Renters don't improve properties because their tenancy can end at the end of every lease term. By providing long term leases - with cost of living increases - landlords could expert their tenants to not only take better care of the properties but also to make capital improvements here and there. Good for the landlord, the tenant, AND the neighborhood.
The majority of taxpayers don't itemize deductions, so I'm not sure how this secret really works.