Investment in Housing in the United States: A Portfolio Approach: The Possible Effects of Changes in Tax Policy

October 1, 1990

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

It is well known that the preferential tax treatment of housing induces an inefficient allocation of saving and investment. This paper analyzes, in a portfolio framework, how eliminating the deductibility of mortgage interest payments for federal income tax purposes might affect investment in housing. Expected rate of return and risk is estimated for three assets, bonds, housing, and stocks. The possibility that assets are imperfect substitutes is explicitly recognized in one section of the paper. The model suggests that the share of housing is likely to decrease by 4 to 9 percentage points if mortgage interest payments are not deductible. This may call for careful phasing of the change in policy.

Subject: External debt, Financial institutions, Housing, Income tax systems, Interest payments, Mortgages, National accounts, Stocks, Taxes

Keywords: asset, assets' rates of return, Housing, housing share, Income tax systems, Interest payments, investor, mortgage interest deductibility, mortgage interest payment, Mortgages, portfolio, portfolio model, rate of return, Stocks, tax treatment, WP

Pages:
38
Volume:
1990
DOI:
---
Issue:
099
Series:
Working Paper No. 1990/099
Stock No:
WPIEA0991990
ISBN:
9781451948806
ISSN:
1018-5941

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Notes

This paper analyzes how the elimination of the decuctibility of mortgage interest payments for federal income tax purposes might affect investment in housing.

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