Housing and the welfare state
One of my favorite writers on housing issues, David Leonhardt of the New York Times, has checked in with a piece highlighting the impact of federal tax policies on the housing bubble. "They have built a system that treats home purchases more favorably than just about any other form of investment."
The most famous of these subsidies is the law that lets you deduct interest payments on a home mortgage from your taxable income. As Leonhardt notes, it explicitly encourages you to spend more money on housing than you otherwise would.
Less well known was the 1997 decision to waive taxes in most cases on the first $500,000 in profits on the sale of a home. Cause and effect, Leonhardt writes: "In the Boston suburbs homes that had appreciated by up to $500,000 since their last sale began going on the market more frequently after 1997, according to an analysis of local housing records by Hui Shan, an economics graduate student at MIT."
The remarkable thing, as Leonhardt notes, is that neither of these measures really increases home ownership -- always the stated purpose -- because both are really designed to help wealthier families. Many lower-income famillies derive no benefit from the mortgage interest deduction, even if they do own a home, because their standardized deduction exceeds their annual interest payments.
As for encouraging people to take tax-free profits from homes they own already...
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I don't think that it's fair to argue that allowing interest deduction by itself does not encourage ownership. It was certainly a factor in my decision as to whether to buy continue to rent, and I know many people besides myself who also are suspicious of the concept of "home as investment" who were ultimately swayed by the interest deduction.
Having said that, I think that a system that incentivizes owning a home to a greater degree than it does charitable donations has screwed up priorities. Also, I would agree that the interest deduction does absolutely nothing to make owning a house more _affordable_, as I'm sure that our free-market economy has simply rolled this advantage into the price of a home. And I also don't argue that it is a regressive tax policy, as people with low-income people with less-expensive properties benefit less than high-income people with expensive properties (and transitively, people on the coasts benefit more than people in the "fly over zone").
But no one really asked me, so for now I'll play the existing rules to my advantage whether I agree with them or not. In my case, that meant buying a place that I felt was sufficiently discounted (due to the weak housing market), and paying for 80% of it with a mortgage (even though I could have afforded to pay cash for most of it).
Are you suggesting a causal relationship between the 1997 tax changes and the bubble?
Because our bubble was part of a global phenomenon. US tax law has no effect on house prices in London or Spain or Ireland--yet those prices skyrocketed, too.
Our tax policy simply cannot be the primary cause.
This blogger might want to review your comment before posting it.