Economics of Home Ownership Subsidies
Why should ever-increasing homeownership be a policy goal? How many people should own homes, anyway?
It’s a good question. Some of the subsidies to homeowners, such as the mortgage interest deduction, tend to go to more affluent people, so from a distributional perspective they are regressive.
From an economics perspective, the question should not be whether home ownership is good or bad for the individual (or family). The question should be whether there are positive or negative externalities.
If housing is a good investment, that is not a positive externality–it is a benefit to the owner. Conversely, if homeownership is risky, that is not a negative externality. If owning a home raises the cost of moving, that is not a negative externality.
Traditionally, one positive externality of home ownership is thought to be that owners maintain their properties better, and this helps maintain property values for others. Condominium associations sometimes will have rules against renting, based on that thesis.
Also, by raising the cost of moving, ownership helps stabilize a neighborhood. Seeing the same people year after year helps people feel more secure. Also, more home ownership might mean that more people will have an interest in long-term public goods, including roads and schools.
One point that is rarely recognized in these sorts of discussions is that renters benefit from the mortgage interest deduction. The owner of a rental property can deduct mortgage interest as an expense. This reduces the owner’s cost, and in a competitive market this cost reduction gets passed along to renters. If markets were highly efficient, then high-bracket taxpayers would buy properties and rent them out to low-bracket taxpayers.
UPDATE: In response to a reader’s comment, pointing out that imputed rent is not taxed. What that does is create a middle clientele, who own homes. The renters have low tax rates, so they don’t care that they are paying rent in pre-tax dollars. The landlords have the highest tax rates, and they get the greatest benefit from being able to deduct interest as a business expense. In the middle are the homeowners, who get more benefit than the low-income renters from not having to pay tax on imputed rent. This is all in a working paper I wrote twenty years ago. Randall Pozdena of the SF Fed had a similar model.
In my opinion, government should never have gotten into the business of subsidizing homeownership. The externalities do not impress me.
However, this is a subsidy business that is difficult to get out of once you have gotten into it. The problem is that the value of the subsidy has been capitalized into the prices of existing homes. If you take away the subsidy, then people will take capital losses.
In this week’s econtalk podcast, Richard McKenzie and Russ Roberts give other examples where government subsidies are capitalized into property values, making it difficult to reverse course. Crop subsidies are an example.
Once government establishes a cap-and-trade program to fight global warming, this will create subsidies that are capitalized into the value of assets. That in turn will make the policy very hard to reverse. Twenty years from now, the climate threat could be a new ice age, and yet changing policy would be as politically unthinkable as eliminating the mortgage interest deduction.