The Sensitivity of Homeowner Leverage to the Deductibility of Home Mortgage Interest

37 Pages Posted: 23 Aug 2005 Last revised: 24 May 2021

See all articles by Patric H. Hendershott

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Gwilym B.J. Pryce

University of Sheffield

Date Written: July 2005

Abstract

Mortgage interest tax deductibility is needed to treat debt and equity financing of homes equally. 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.

Suggested Citation

Hendershott, Patric H. and Pryce, Gwilym, The Sensitivity of Homeowner Leverage to the Deductibility of Home Mortgage Interest (July 2005). NBER Working Paper No. w11489, Available at SSRN: https://ssrn.com/abstract=762768

Patric H. Hendershott (Contact Author)

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gwilym Pryce

University of Sheffield ( email )

ICOSS Building, 219 Portobello,
University of Sheffield
Sheffield, England S1 4DP
United Kingdom

HOME PAGE: http://https://www.sheffield.ac.uk/smi/about-us/gwilym-pryce

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