Housing and the tax system: how large are the distortions in the euro area?

Date Published 8/2/2017
Author Serena Fatica, Doris Prammer
Theme Housing Finance Policy

This paper by the Housing Finance Consumption Network (HFCN) of the European Central Bank shows evidence of the size and impact of various preferential tax treatments of home-ownership across 15 European countries. It is one of the first comparative studies on this topic for Europe. Using the analytical framework of the user cost of capital, it finds that owner-occupiers are generally undertaxed. The user-cost for owner-occupiers is almost 40 percent below the efficient level under a tenure neutral tax system where the net return to home-occupiers is fully taxed, which drives up consumption of housing services by close to 8 percent. The bulk of the tax subsidies comes from under-taxation of return on home-equity, while the average tax-relief for mortgage interest payments is driven down by low average loan-to value ratios. Nevertheless, the marginal value of the tax break for mortgage interest is sizable. 

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