Comparing Downpayment and Interest Rate Mortgage Subsidies: An Analytical Approach

Ricardo Bebczuk y Edgardo Demaestri and Ricardo Bebczuk y Edgardo Demaestri
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Ricardo Bebczuk y Edgardo Demaestri: Universidad Nacional de La Plata
Ricardo Bebczuk y Edgardo Demaestri: Inter-American Development Bank (IADB)

Económica, 2015, vol. 61, 35-51

Abstract: Our paper sets up a simple model to assess, for the first time, the relative pros and cons of housing downpayment (DS) and interest rate (IRS) subsidies on the access to and the stability of the mortgage market. Our analysis unveils a number of relevant policy lessons for the design of housing subsidy programs, among them: (a) For fiscal neutrality (same government outlay) to hold, the percentage IRS must be larger than the DS; (b) The IRS raises the loan size a bank is willing to grant, but the DS; (c) When targeting lower income households, the DS is superior to the interest rate subsidy; (d) The DS may increase the probability of default due to this focalization, while the IRS may have the same effect via the increased borrower leverage; and (e) Compared to the IRS, the DS promotes a less aggressive competition in the real estate market.

Keywords: Mortgage subsidies; subsidy focalization; government subsidies; bank mortgage market. (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:akh:journl:597

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