Housing and the tax system: how large are the distortions in the euro area?

This paper presents new evidence on the impacts of the beneficial treatment of owner-occupied housing in Europe. We find that tax benefits to homeowners reduce the user cost of housing capital by roughly one-third compared to the efficient level that would occur with neutral taxation. On average, the tax subsidy translates into an excess consumption of housing services equivalent to 6.5 percent of the value of owner-occupied housing, or about 30 percent of financial asset holdings in household portfolios. The bulk of the subsidy stems from under-taxation of the return to home equity, while the average contribution of the mortgage interest relief is driven down by relatively low loan-to-value ratios in the data. However, at the margin, the tax–induced incentive to use mortgage debt to finance the purchase of the main residence is substantial.JRC.B.1-Finance and Econom