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We present a dynamic life-cycle model of demand for housing, including owner occupied housing, investment property and liquid assets. Households face down payment requirements and liquidity constraints, and a progressive tax system where owner-occupied housing is subsidized. The model replicates key facts about home ownership, financial assets, debt and consumption. Our model predicts that taxing imputed rent would raise enough revenue to fund a 9.15% income tax rate cut, and lead to substantial efficiency gains. We also find that replacing the mortgage interest deduction with a refundable 24.6% mortgage interest credit would increase the ownership rate by 5.9%. Gains are concentrated among low to middle income households and young households, as housing becomes more affordable for them.
Authors
Research Associate John Hopkins Carey Business School
Michael Keane is a Wm. Polk Carey Distinguished Professor at the John Hopkins Carey Business School.
Researcher University of New South Wales
Working Paper details
- DOI
- 10.1920/wp.ifs.2024.4824
- Publisher
- Institute for Fiscal Studies
Suggested citation
Keane, M and Liu, X. (2024). Tax preferences and housing affordability: Exploration using a life-cycle model. 24/48. London: Institute for Fiscal Studies. Available at: https://ifs.org.uk/publications/tax-preferences-and-housing-affordability-exploration-using-life-cycle-model (accessed: 11 November 2024).
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