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

Krister Andersson

No 1990/099, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; rate of return; asset; portfolio; investor; mortgage interest payment; tax treatment; portfolio model; housing share; assets' rates of return; mortgage interest deductibility; Housing; Mortgages; Interest payments; Stocks; Income tax systems (search for similar items in EconPapers)
Pages: 38
Date: 1990-10-01
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